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STANDARDS  OF  REASONABLENESS 


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'  LOCAL  FREIGHT  DISCRIMINATIONS 


BY 


JOHN  MAURICE  CLARK,  A.  M., 

Sometime  Fellow  in  Economics,  Columbia  University 
Instructor  of  Political  Economy  in  Colorado  College 


""v/uep'" 


SUBMITTED  IN  PARTIAL  FULFILMENT  OF  THE  REQUIREMENTS 

FOR  THE  DEGREE  OF  DOCTOR  OF  PHILOSOPHY 

IN  THE 

Faculty  of  Political  Science 
Columbia  University 


NEW  YORK 
191O 


J 


STANDARDS  OF  REASONABLENESS 


IN 


LOCAL  FREIGHT  DISCRIMINATIONS 


BY 

JOHN  MAURICE  CLARK,  A.  M., 

Sometime  Fellow  in  Economics,  Columbia  University 
Instructor  of  Political  Economy  in  Colorado  College 


SUBMITTED  IN  PARTIAL  FULFILMENT  OF  THE  REQUIREMENTS 

FOR  THE  DEGREE  OF  DOCTOR  OF  PHILOSOPHY 

IN  THE 

Faculty  of  Political  Science 
Columbia  University 


NEW  YORK 
191O 


.0^ 


Copyright,  1910 

BY 

JOHN  MAURICE  CLARK 


■fr^^  .  ■-■^w.M^.tMJ^J.-  AL.Pk.'.!-^gWSit!l'*^^<jm 


PREFACE 


Had  the  author  of  this  monograph  realized  from  the 
start  the  full  nature  of  the  problem  he  was  approaching, 
it  is  probable  he  would  have  turned  aside.  He  has  since 
been  consoled  by  the  thought  that  in  such  a  task,  failure 
was  not  disgrace.  The  fundamental  purpose  of  the  work 
is  to  gather  from  scientific  and  popular  discussions  alike 
the  various  ideas  as  to  what  constitutes  reasonableness 
as  between  different  localities  in  the  adjustment  of  freight 
rates,  and  to  reduce  them  by  analysis  to  that  definiteness 
which  many  of  them  so  sadly  lack.  It  was  hoped  that, 
without  attempting  a  solution  of  the  enigma,  the  exact 
issues  involved  in  some  of  the  present  conflicts  of  inter- 
est and  ideas  might  be  presented  with  somewhat  of  added 
clearness.  However,  if  the  work  prove  in  any  degree 
suggestive  or  stimulating  of  thought  upon  this  great 
problem,  it  will  have  accomplished,  perhaps,  all  that 
could  reasonably  be  expected. 

The  author  cannot  express  sufficiently  his  indebtedness 
to  his  father,  Dr.  J.  B.  Clark,  of  Columbia  University, 
not  only  for  his  direct  and  invaluable  assistance  in  pre- 
paring this  monograph ;  but  for  the  stimulus,  guidance 
and  instruction  which  have  made  possible  whatever  the 
author  has  achieved  or  may  achieve.  Special  acknowl- 
edgment is  also  due  to  Dp.  E.  R.  A.  Seligman,  of 
Columbia,  to  Dr.  Emory  R.  Johnson,  of  Pennsylvania, 
and  to  the  members  of  the  Railroad  Commission  of  Wis- 
consin, especially  Dr.  B.  H.  Meyer  and  Mr.  Halford  Erick- 
son,  for  their  cordial  assistance,  criticism  and  advice. 

J.  M.  Clark. 
Colorado  College,  Colorado  Springs,  April,  igio, 

5]  5 


2057C9 


1 


■^ 


TABLE  OF  CONTENTS 


INTRODUCTION 

FACB 

'.The  problem  stated 9 

'The  two  schools  of  opinion 10 

CHAPTER  I 

Railways  and  the  Law  of  Cost 

Resemblance  of  railways  and  manufactures 18 

Possibility  of  permanent  violations  of  static  law 19 

:      Similarity  of  place  and  form  utilities  .    .       20 

I     Differences  between  railways  and  manufactures 21 

The  principle  of  joint-cost  defined 22 

The  principle  distinguished  from  that  of  J.  S.  Mill 22 

The  theory  of  Marshall  and  Walker 24 

The  theory  as  finally  evolved 26 

"  General  and  special"  vs.  "constant  and  variable"  expenses  .   .  29 

Factors  tending  to  minimize  the  distinction 32 

CHAPTER  II 

Plan  of  Railway  Competition  in  the  General 
Competitive  System 

Tendencies  of  competition  under  various  conditions.  .   .....  38 

Table  showing  these  tendencies  ...           42 

Place  of  railway  competition  in  this  tabulation      42 

</  Place  of  "  competition  of  markets  "  in  this  tabulation 43 

v"  Market  competition  "  and  local  disadvantages  in  production    .    .  46 

CHAPTER  III 

"Value  of  Service"  as  a  Standard  of  Reasonableness 
UNDER  Free  Conditions 

Vagueness  of  the  "  value  of  service  "  theory 50 

Values  self-determined  or  interdependent 51 

7]  7 


k^ 


g                                    TABLE  OF  CONTENTS  [g 

BAGS 

Issue  between  private  values  and  public  interest 54 

Criticism  of  various  statements  of  the  doctrine  of  the  identity  of 

private  and  public  interests 57 

^   Standards  of  reasonableness  thereby  suggested 66 

CHAPTER  IV 

Private  Rates  and  Public  Interest 

Some  special  results  of  the  "  value  of  service"  theory 68 

Fundamental  classification  of  discriminations 72 

^  Market  competition  and  the  motive  to  discriminate 73 

<^,  Kinds  of  discriminations  produced  by  market  competition 75 

'    Agriculture  vs.  manufactures  in  market  competition 79 

Afferent  vs.  efferent  market  competition 80 

"  Dividing  the  field  " 83 

"Just  meeting  "  existing  competition 84 

CHAPTER  V 

Railway  Rates  and  Commercial  Policy 

Possible  use  of  rates  to  supplement  protective  tariffs 87 

This  policy  clumsy  and  unnecessary 90 

Extent   to  which    import-rates  neutralize  customs  duties  in  the 

United  States 91 

CHAPTER  VI 

The  General  Level  of  Charges 

The  public  has  conflicting  interests 94 

Canals  vs.  railways 96 

General  vs.  special  benefits  of  railway  carriage 97 

Criticism  of  Dr.  Launhardt's  argument  for  rates  below  cost  ....  100 

CHAPTER  VII 

Ideal  or  "Natural"  Systems  of  Relative  Rates 

Their  basis  in  the  law  of  comparative  cost 106 

Difificulty  of  applying  this  consistently 108 

It  need  not  be  applied  to  non-competing  goods 108 

An  imaginary  "  natural  "  system  and  why  it  must  break  down  .  •  109 
No  method  of  apportioning  fixed  charges  can  satisfy  strictly  the 

law  of  comparative  cost 113 

But  by  classifying  both  goods  and  distances  the  trouble  is  largely 

avoided 114 

The  trouble  not  entirely  avoided.     Various  public  policies  govern.  115 


9]                                  TABLE  OF  CONTEKTS  O 

PACK 

CHAPTER  VIII 

Reasonableness  in  Decisions  of  the  Courts  and  of  the 
Interstate  Commerce  Commission 

Carriage  at  less  than  cost  may  be  required ii6 

But  in  general  each  part  of  a  system  should  cover  costs ii8 

The  "  infant  industry  "  principle ii8 

Methods  of   apportioning    costs  on    single    shipments  and    their 

weaknesses iig 

Key  to  relative  reasonableness  the  effect  on  industrial  competitors.  122 

Summary  of  common-law  doctrine 122 

Prominence  of  the  comparative-cost  standard  under  Federal  law  .  .  124 

Other  standards 125 

General  policy  of  the  commission 129 

CHAPTER  IX 

General  Principles  of  Distance-Tariffs 

^  Three  chief  kinds  of  distance-tariffs 136 

The  economic  basis  of  the  staffeltarif 138 

The  averaging  of  costs 139 

The  "objective  value"  of  service 140 

The  staffeltarif  a.n6.  maximum  earnings 143 

Exceptions  to  the  staffeltarif 144 

CHAPTER  X 

An  American  Distance-Tariff 

Difficulty  of  universal  introduction 147 

The  scales  used  by  the  Wisconsin  commission 148 

Circumstances  allowed  for  outside  the  scales 14Q 

Practical  usefulness  of  such  scales 152 

Possible  further  refinements 153 

*^The  question  of  jobbing  centers 154 

^  Summary  of    conclusions 155 


INTRODUCTION 

"All  charges  made  for  any  service  rendered  or  to  be  rendered  in  the 
transportation  of  passengers  or  property  as  aforesaid,  or  in  connection 
therewith,  shall  be  just  and  reasonable;  and  every  unjust  and  un- 
reasonable charge   for  such  service  or  any  part  thereof  is  prohibite 

and  declared  to  be  unlawful it  shall  be  unlawful  for  any  common 

carrier  to  make  or  give  any  undue  or  unreasonable  preference  or  ad- 
vantage to  any  particular  person,  company,  firm,  corporation  or 
locality,  or  any  particular  description  of  traffic,  in  any  respect  what- 
ever, or  to  subject  any  particular  person,  company,  etc.,  to  any  undue 
or  unreasonable  prejudice  in  any  respect  whatever." 
An  Act  to  Regulate  Commerce ,  as  amended  June  29,  igo6.  Sections 

I  and  3. 

In  an  atlas  it  is  the  unexplored  regions  that  look 
simplest.  In  the  same  way  unexplored  fields  of  human 
knowledge  may  be  neatly  covered  by  a  simple  word  or 
phrase,  whose  exact  application  may,  however,  be  as 
vague  as  the  dotted  lines  in  the  chart  of  a  virgin  conti- 
nent, and  about  as  useful  to  the  explorer  or  investigator. 
So  when  a  legislative  body  creates  a  commission  with  the 
task  of  enforcing  railway  charges  that  shall  be  absolutely 
and  relatively  "  reasonable  ",  it  is  much  as  if  they  were 
sending  a  band  of  engineers  to  develop  the  mineral  re- 
sources of  Labrador;  where  the  country  is  explored,  to 
be  sure,  but  not  charted  with  any  approach  to  accuracy. 
Or  it  is  like  a  school  where  teaching  is  confined  to  tell- 
ing the  children  to  be  wise  and  good.  Thus,  to  drop 
the  figure,  the  whole  problem  of  rate  regulation  may  be 
expressed  as  the  task  of  defining  accurately  and  workably 
the  single  phrase:  '^reasonable  charges  and  services^',  or 
11]  II 


12  LOCAL  FREIGHT  DISCRIMINATIONS  [12 

the  one  word :  "  reasonable.^^  It  is  the  problem  of  set- 
ting up  concrete  standards  and  rules  of  reasonableness, 
and  it  will  be  the  task  of  the  present  work  to  present 
and  discuss  some  of  the  various  possible  criteria  as  ap- 
plied to  railway  freight  rates,  and  in  particular  to  the 
relative  adjustments  as  between  localities,  in  such  a  way 
as  to  show  the  exact  issues  involved. 

In  doing  this,  the  writer  will  not  attempt  to  make  a 
long  list  of  different  theories,  but  will  confine  himself  to 
studying  diiiferences  that  are  both  fundamental  and  im- 
portant in  a  practical  way.  Most  fundamental  of  all  is 
the  difference  between  the  two  motives  that  may  govern 
a  carrier.  There  is  the  motive  of  private  gain  which 
actuates  all  business  corporations,  and  the  motive  of 
public  service  which  shows  itself  in  the  policy  of  state 
railways ;  and  it  is  this  difference  of  possible  motive  that 
gives  the  key  to  the  difference  between  the  two  kinds  of 
railway  administration,  the  public  kind  and  the  private 
kind,  iif 

By  this  it  is  not  meant  that  private  companies  are 
governed  only  by  their  private  interest,  nor  that  public 
railways  leave  this  motive  out  of  all  account.  Indeed, 
there  is  no  great  railway  system  where  either  is  carried 
out  in  its  pure  form.'  Any  railway  partakes  of  the  two 
natures  and  is  governed  by  the  two  motives.  It  is  both 
a  business  enterprise  affected  by  self  interest,  and  a 
branch  of  the  public  service  bound  to  promote  the  wel- 
fare of  the  community  at  large;  and  yet  the  division 
already  mentioned  is  a  very  clear  one.  On  the  one  hand 
is  the  private  system  with  a  minimum  of  public  control ; 
— such  a  system  as  those  of  England  and  of  the  United 

'  Pauer,  Lehrbuch  des  Eisenbahntarifwesens ,  i;  Seidler  &  Freud,  Die 
Eisenbahntarifwesen  in  ihren  Beziehungen  zur  handelspolitik,  1-3. 


i_-:i\ 


13]  INTRODUCTION  13 

States.  In  it  free  play  is  given  to  "  economic  forces  ", 
a  phrase  by  which  is  commonly  meant  the  forces  of  pri- 
vate self-interest.  Its  distinguishing  marks  as  to  freight 
charges  are: — rates  fixed  separately  from  one  station  or 
group  of  them  to  other  stations  or  groups,  resulting  in 
tariff  sheets  as  numerous  as  autumn  leaves,  much  elas- 
ticity of  rates,  large  forces  of  traffic  men  to  make  them 
and  the  freest  disregard  of  distance,  resulting  in  many 
apparent  anomalies.  On  the  other  hand  there  are  the 
public  systems  such  as  the  German  and  Austrian  state 
railways  where  public  control  is  complete.  Such  systems 
are  characterized  by  mathematical  scales  based  on  dis-  \ 
tance  and  governing  the  local  traffic.  Through  rates  are 
based  on  these  scales,  with  reductions  subject  to  fairly 
general  rules.  Station-to-station  rates  are  not  absent,' 
but  they  are  the  exception  and  must  justify  themselves 
before  some  public  body.  Special  and  differential  rates 
must  bear  the  burden  of  proving  themselves  reasonable, 
economically  necessary  or  useful  from  some  public  point 
of  view.  Not  that  the  self-interest  of  the  roads  is  left  in 
the  background.  Indeed  some  foreign  writers  think  it 
is  by  far  the  more  prominent  of  the  two  motives'"  and 
that  the  public  motive  merely  serves  to  modify  the  work- 
ings of  the  private  motive,  the  latter  being  fundamental. 
On  the  other  hand,  fortunately,  the  "private  systems" 
do  not  leave  the  general  good  entirely  out  of  account. 
The  difference,  then,  lies  in  the  relative  emphasis  laid  on 
the  two  motives. 

As    to    the    theoretical    basis   of    their    systems,    both 

'  Huebner,  Prussian  Railway  Rates,  passim.  For  general  descrip- 
tions of  all  foreign  freight-rate  systems  see  Bulletin  of  International 
Railway  Congress  for  1905,  Section  4,  p.  1976  (Eng.  ed.). 

'Pauer,  Lehrbuch  des  Eisenbahntarifwesens,  p.  2.  Seidler  &  Freud, 
op.  cit.,  pp.  1-3.     Other  and  older  writers  disagree. 


14  LOCAL  FREIGHT  DISCRIMINATIONS  [14 

schools  are  agreed  in  a  general  way.     Both  go  on  the 
principle  of  covering  fixed  costs  by  fixing  rates  accord- 
ing to  the  "value  of  the  service"  or  "what  the  traf^c 
will  bear."     But  this  theoretical  agreement  does  not  pre- 
vent wide  practical  differences,  and  the  reason  lies  simply 
in  the  fact  that  the  value  principle  in  its  bare  form  is  not 
a  positive  but  a  negative  one.     As  we  shall  see  later,  it 
offers  no  external  standard  for  judging  rates  or  adjusting 
them.     Of  course,  rates  are  phases  of  value,  for  they  are 
themselves  the  money  value  of  particular  services.     But 
the  economic  laws  of  value  take  on  very  different  aspects 
according  as  a  business  is  public  or  private  in  character. 
V         or  as  it  is  monopolistic,  competitive  or  of  mixed  nature. 
I  So  it  is  clear  that  an  agreement  that  goes  no  farther  than 
'  this  is  meaningless.     All  that  the  "value"  principle  nec- 
i   essarily  means  is  the  policy  of  breaking  away  from  mile- 
age or  "natural'"  or  cost    systems  in  the  direction  of 
greater  freedom. 

In  this  process  of  breaking  away,  the  American  has 
gone  much  further  than  the  German;  or  rather,  the 
Germans,  after  an  experience  of  rate-making  chaos,  have 
with  much  difficulty  established  a  system  of  order  and 
uniformity.'  And  each  from  his  own  point  of  view  may 
well  look  on  the  other  as  backward.  The  German,  per- 
haps, fails  to  seize  every  chance  to  encourage  new  traffic 
which  might  be  made  to  pay  a  little  something;  while 
the  American  rates  are  too  complicated,^  too  unstable 
and  place  in  the  hands  of  private   persons  an  arbitrary 

'  Burmeister,  Geschichtliche  Enlwickelung  des  Gutertariis  der  Eisen- 
bahnen  Deutschlands,  pp.  6-8.  12-15,  48-50. 

''Possibly  it  is  unfair  to  compare  America  with  any  one  European 
country.  In  a  comparison  with  tariffs  for  long  hauls  through  several 
states  in  Europe,  American  rates  would  hardly  suffer  as  being  too  com- 
plicated. 


— \ 


^::x\_  > 


1 5  ]  INTRO  D  UCTION  1 5 

power  over  the  development  and  location  of  industry. 
Time  alone  will  show  conclusively  w^hich  point  of  view  is 
nearer  the  truth,  or  whether  each  system  is  suited  to  the 
peculiar  conditions  of  its  environment  and  so  each  is 
right.     Each  recognizes  certain  ethical  elements. 

For  any  law  of  value,  to  be  accepted  and  acquiesced  in, 
must  of  course  be  ethical.  The  doctrine  of  free  compe- 
tition has  an  ethical  principle  at  the  bottom  of  it,  but  it 
can  be  perverted ;  and  if  this  happens,  justice  must  be 
restored  if  possible  by  seme  force  other  than  that  of 
private  self-interest.  The  German  believes  this  to  be 
true  of  railroad  rates,  and  builds  his  system  on  this  idea, 
an  idea  which  the  American  also  accepts,  but  without 
carrying  its  results  so  far.  From  a  German  point  of  view, 
the  American  road  is  private  property,  too  slightly 
afifected  by  a  vital  public  interest.  From  the  American 
point  of  view,  a  Prussian  road  is  a  public  business  rend- 
ered somewhat  less  efficient  than  it  might  be,  by  a  mis- 
taken idea  that  the  public  interest  demands  mathematical 
rates  based  on  distance. 

As  to  how  far  agreement  is  possible  between  these 
ideas,  the  discussions  of  the  International  Railway  Con- 
gress of  1905  ofifer  interesting  evidence.  After  hearing 
reports  on  freight-rate  systems  from  nearly  every  coun- 
try, the  congress  adopted  a  brief  platform  representing 
the  unanimous  agreement  of  the  delegates,  as  follows  : ' 

Tariflfs  should  be  based  on  commercial  principles,  taking:  into 
account  the  special  conditions  which  bear  upon  the  commer- 
cial value  of  the  services  rendered. 

With  the  reservation  that  rates  should  be  charged  without 
arbitrary  discrimination  to  all  shippers  alike  under  like  con- 
ditions, the  making  of  rates  should,  as  far  as  possible,  have  all 

^Bulletin  of  International  Railway  Congress,  1905,  p.  1972. 


l6  LOCAL  FREIGHT  DISCRIMINATIONS  [i6 

the  elasticity  necessary  to  permit  the  development  of  the 
traffic,  and  to  produce  the  most  beneficial  results  to  the  public 
and  to  the  railroads  themselves. 

This  is  a  sort  of  theoretical  highest  common  factor  of 
all  existing  systems.  On  this  much  at  least  all  systems 
agree.  The  platform  states  that  freedom  should  be 
allowed  only  so  far  as  is  for  the  best  interests  of  the 
roads  and  public  both  ;  and  also  specifically  sets  up  the 
principle  that  all  shippers  must  be  charged  alike  under 
like  conditions. 

As  to  the  interpreting  of  these  ideas,  however,  there 
is  a  large  range  of  difference.  Under  the  platform  thus 
set  up,  the  American  railroad  manager  is  a  strict  con- 
structionist and  champion  of  private  liberty,  while  the 
Continent  of  Europe  shows  the  opposite  tendency. 

This  shows  itself  in  the  forms  of  the  tariffs,  for  the 
striking  feature  of  the  continental  system  is  the  fixing  of 
rates  by  scales  {''  Staffeltarifen''  or  ''Baronies'')  based 
on  distance,  while  in  America  and  England  tariffs  are 
fixed  separately,  from  each  station  or  group  of  stations 
to  every  other  station  or  group  of  stations.  In  America, 
the  use  of  distance  scales  is  not  unknown  for  local  and 
even  for  through  shipments,  '  while  abroad  station-to- 
station  rates  and  group  rates  are  much  used  and  govern 
some  of  the  most  important  traffic.  As  far  as  the  form 
of  the  rate  system  goes,  it  may  be  said  that  the  differ- 
ence is  one  of  degree  and  not  of  kind  ;  a  difference  in 
the  emphasis  laid  on  the  two  kinds  or  rates.  But  there 
is  more  in  it  than  that.     For  in  Germany  or  Austria  all 

'W.  Z.  Ripley,  "  The  Trunk  Line  System,  a  distance  tariff."  Ouar. 
Jour.  Ec,  1906,  p.  183.  Considerations  of  distance  are  becoming  more 
important  in  the  fixing  of  railway  tariffs,  through  natural  evolution, 
through  the  influence  of  commissions,  or  from  both  causes.  This 
topic  is  treated  more  fully  in  chapter  x,  infra. 


17]  INTRODUCTION  1 7 

exceptions  must  bear  the  approval  of  the  government  as 
a  public  certificate  of  good  moral  character;  while  in 
America  for  the  most  part  they  stand  unquestioned, 
unless  by  complaint  of  some  shipper  they  are  brought 
before  some  overworked  regulative  commission  to  be 
tried  for  the  misdemeaner  of  being  "  unreasonable,"  and 
held  innocent  unless  and  until  proved  guilty. 

It  is  significant  that  the  platform  adopted  by  the 
International  Railway  Congress,  to  which  reference  has 
been  made,  is  most  vague  as  to  the  most  crucial  point 
— that  of  relatively  fair  treatment  of  different  shippers. 
For  this  is  most  emphatically  not  secured  by  merely 
undertaking  to  treat  "all  shippers  alike  under  like  con- 
ditions." What  proportion  of  manufacturers  hand  over 
their  business  to  the  railroads  under  strictly  "like  con- 
ditions" with  their  competitors?  An  unfair  discrimina- 
tion between  persons  is  none  the  less  unfair  because 
those  persons  happen  to  ship  from  different  stations.  It 
is  merely  harder  to  judge.  In  the  one  case  justice  de- 
mands flat  equality  of  treatment ;  in  the  other,  a  differ- 
ence adjusted  fairly  to  the  difference  of  conditions. 
Local  discrimination  is  not  different  from  personal  dis- 
crimination, only  more  complicated;  and  its  complica- 
tions may  well  be  said  to  form  the  Gordian  Knot  of  the 
railroad  problem. 

It  is  this  knot  which  the  German  cuts  with  the  knife  of 
a  statistical  average,'  and  there  are  signs  in  America  of  an 
increasing  tendency  toward  an  effective  use  of  the  same 
weapon.  The  mathematical  darSme  is  an  efficient  statu- 
tory definition  of  "  absolutely  and  relatively  reasonable 
freight  rates."  It  establishes  a  standard  of  automatic 
justice :  ^  although  a  skeptic  may  be  allowed  to  question 

'Rank,  Eisenbahntarifwesen,  pp.  175-6,  573,  et  passim. 
'Ulrich,  Eisenbahntarifwesen,  p.  74. 


OF   THE 

UWIVERSITY 

or 


l8  LOCAL  FREIGHT  DISCRIMINATIONS  [i8 

whether  its  greatest  merit  is  the  accuracy  and  complete- 
/  \  ness  of  the  justice  secured,  or  the  mere  fact   that  it  is 
^automatic. 

But  granting  all  this ;  granting  that  the  justice  secured 
is  only  approximate,  the  German  believes  it  is  a  better 
approximation  than  would  come  out  of  the  discretionary 
power  of  the  fixers  of  rates  acting  under  the  motives  of 
railway  self-interest.  Such  unfairness  as  exists  is  at  least 
not  arbitrary,  and  is  limited  in  extent.  And  conceding 
the  existence  of  a  certain  economic  loss  due  to  cramping 
\  i  somewhat  the  freedom  of  the  roads  to  bid  for  new  busi- 
ness, the  German  believes  it  is  more  than  made  good  by 
simplicity,  stability,  and  freedom  from  gross  anomalies 
and  from  opportunities  for  favoritism. 

Perfection  is  not  claimed  for  any  of  these  foreign  sys- 
tems. M.  Picard'  allows  that  in  the  schedules  of  the 
French  railways,  beside  the  exceptions  made  for  commer- 
cial and  competitive  reasons,  some  have  to  be  made 
merely  to  give  just  weight  to  factors  in  the  cost  of  ser- 
vice for  which  the  formula  cannot  allow.  And  a  Ger- 
man writer  admits  that  for  the  mere  promoting  of  rapid 
economic  growth  the  mathematical  scale  is  inferior,  but 
he  claims  compensating  advantages.  He  says:  "The 
economic  development  of  the  civilized  states  would  have 
been  perhaps  slower,  but  it  would  have  been  also  sounder 
if  it  had  not  been  for  the  undue  and  badly  distributed 
stimulus  of  arbitrary  private  rate-fixing."^  And  in  clos- 
ing, the  writer  may  venture  the  statement,  without  fear 
of  contradiction  by  railway  men,  that  there  is  not,  and 
can  never  be,  a  perfect  rate  system  in   the  sense  of  one 

'  Ttaite  des  Chemins  de  Fer.     Quoted  in  Bulletin  of  International 
Railway  Congress,  1905,  p.  229. 
•Ulrich,  Eisenbahntarifwesen,  p.  102.     The  translation  is  my  own. 


ig]  INTRODUCTION  ig 

that  can  be  mathematically  demonstrated  to  be  economic-!  ^ 
ally  correct  in  every  given  case. 

So  much  for  the  issue  between  the  two  schools,  briefly 
stated.  The  American  system  in  its  machinery  of  regu- 
lation lacks  rules  and  precepts  which  should  constitute 
a  formal  definition  of  the  term  "reasonable"  as  applied 
to  freight  charges :  a  lack  which  the  foreigner  does  not 
experience  to  any  such  extent.  A  term  on  which  so 
much  depends  cannot  long  remain  entirely  vague  in  its 
meaning.  Lacking  more  complete  statutory  definition, 
the  accumulated  decisions  of  commissions  and  courts  as 
concrete  cases  come  up  for  settlement  will  furnish  a 
body  of  common  law  on  the  subject.  There  are  indeed 
three  ways  in  which  this  vagueness  may  be  resolved. 
The  first  is  the  common-law  method  already  mentioned. 
Secondly,  the  legislative  bodies  may  pass  more  detailed 
laws  as  to  what  the  commissions  shall  do  in  cases 
brought  before  them  by  complaint.  Thirdly,  such 
bodies  as  our  commissions  may  do  a  similar  thing  for 
themselves  by  drawing  up  in  advance  formal  guides  to 
reasonableness ;  rules  of  general  application.  We  are 
gaining  by  the  results  of  experience  along  all  these  lines. 


CHAPTER  I 

RAILWAYS    AND    THE    LAW    OF    COST 

An  eminent  writer  on  railway  matters  mentions  hav- 
ing sometime  ago  encountered  the  feeling  that  the  edu- 
cated section  of  the  American  people  who  formed  his 
audience  no  longer  needed  to  be  carefully  informed  of 
the  fact  that  a  railway  was  essentially  different  in  its 
nature  from  a  grocery  store  or  a  soap  factory,  and  were 
well  aware  that  the  fixing  of  its  rates  differed  from  the  for- 
mation of  ordinary  commodity  prices.'  Consideration  of 
this  fact  would  deter  the  present  writer  from  taking  up  the 
reader's  time  with  the  fundamentals  of  this  problem  were 
it  not  that  it  has  many  phases  and  relations,  which  have 
been  treated  in  somewhat  different  ways,  and  a  compar- 
ative and  critical  view  of  some  of  these  various  treat- 
ments may  perhaps  be  found  worth  while.  And  in  the 
first  place,  the  railway  and  the  factory  do  not  differ  so 
fundamentally  as  many  have  assumed.  Their  difference 
is  rather  one  of  degree  than  of  kind.  Both  have  large 
fixed  plants,  and  large  "general"  or  "fixed"  or  "joint" 
expenses  to  deal  with,  and  the  cost  accounting  of  both 
is  complicated — more  so  in  the  case  of  the  railroad. 
The  crux  of  the  railroad  problem  is  unreasonable  dis- 
criminations in  prices,  yet  even  in  a  manufacturing  busi- 
ness this  is  not  a  matter  which  can  with  entire  safety  be 

*B.  H.  Meyer,  in  Papers  and  Proceedings  of  18th  Annual  Meeting 
ot  the  American  Econ.  Assoc,  p.  69. 

20  [20 


21  ]  RAILWAYS  AND  THE  LAW  OF  COST  2 1 

left  to  the  self-interest  of  the  managers.'  Such  a  course 
may  too  easily  allow  that  kind  of  "free"  competition 
which  is  not  based  on  service  to  society  and  which  leads 
to  monopoly.  However,  the  need  of  restriction  on  this 
power  of  the  managers  is  not  so  vital  that  we  have  not 
gotten  on  fairly  well  for  many  years  without  it.  In  the 
case  of  the  railroads  the  situation  is  different.  The 
question  is  not  one  of  preventing  a  road  from  using  dis- 
criminations in  its  rates  to  drive  its  direct  competitors 
out  of  business  at  points  of  contact :  that  question  has 
been  fought  out  and  settled.  Direct  competition  of 
rates  at  junction-points  is  clearly  diminishing,  in  the  face 
of  statutes  designed  to  retain  it,  and  its  passing  need 
excite  no  regret.  This  proposition  is  so  generally  con- 
ceded that  it  is  not  worth  further  discussion.  The  vital 
question  with  a  railroad  is  the  efifect  of  its  rates  on  the 
conditions  of  competition  in  those  industries  whose 
products  it  carries.  It  is  as  if  a  great  manufacturing  in- 
dustry had  to  do  with  putting  certain  finishing  touches 
on  goods — finishing  touches  which  could  add  value  to 
any  kind  of  article  at  all.  If  the  charges  for  these  ser- 
vices could  be  arbitrarily  varied,  it  can  easily  be  seen 
that  those  who  carry  on  this  final  completing  pro- 
cess would  hold  in  the  hollow  of  their  hands  the  pro- 
ducers in  all  the  processes  which  come  earlier  in  the 
series.  They  would  have  an  almost  inconceivable  power 
over  the  whole  economic  system.  Here  steps  in  the 
possibility  of  violations  of  "natural  law"  which  shall  be 
not  transient  but  permanent. 

The   application   of   classical    principles    to   twentieth 
century  conditions  is  just  a  little  like  the  application  of 

'  See  whole  discussion  of  unfair  competitive  discrimination  in  Clark, 
Th^  Problem  of  Monopoly  and  The  Control  of  Trusts. 


22  LOCAL  FREIGHT  DISCRIMINATIONS  [22 

the  United  States  Constitution  to  twentieth-century 
problems :  it  makes  them  cover  conditions  which  their 
framers  never  contemplated,  and  for  which  they  would 
doubtless  have  made  specific  allowance  had  they  con- 
ceived of  them  at  all.  In  formulating  static  law  it  is 
natural  to  have  in  mind  some  few  forms  of  organization 
which  are  typical  of  the  great  departments  of  production. 
In  the  past,  these  typical  forms  of  production  could  be 
easily  shown  to  follow  the  tendencies  expressed  in  the 
general  laws.  The  concrete  examples  which  naturally 
come  into  men's  minds  could  without  great  difficulty  be 
shown  to  follow  the  simple  law  of  competition,  at  least 
in  a  general  way.  But  now  we  have  this  peculiar  condi- 
tion before  us,  that  the  one  biggest  single  industry  of  all 
seems  to  violate  static  law  irreconcilably — to  nullify  it 
completely.  Here  we  have  production  under  conditions 
foreign  to  the  experience  of  the  classical  economists. 
Their  works  do  not  solve  the  problem  of  value  in  this 
special  case,  because  their  world  contained  nothing  quite 
like  it. 

Not  that  the  essential  nature  of  it  is  different  from 
ordinary  production  of  wealth,  if  we  go  back  to  the  sim- 
plest fundamentals.  The  place  of  the  railway  in  the 
scheme  of  things  is  to  increase  the  value  of  goods  by 
giving  them  the  extra  utility  of  place.  Just  so  the  fac- 
tory takes  the  raw  material  and  moves  the  particles  on 
each  other  till  the  mass  takes  a  new  shape,  as  in  mould- 
ing or  casting;  or  it  removes  unnecessary  parts  as  in 
planing  and  turning ;  or  it  moves  different  goods  into 
new  place-relations  to  each  other,  putting  together  a 
machine,  a  book,  a  piece  of  furniture.  This  process  is 
that  of  moving  quantities  of  matter  from  place  relations 
in  which  they  have  less  utility  into  others  in  which  they 
have  more.     Similarly  the  railroad  takes  material  goods 


23]  RAILWAYS  AND  THE  LAW  OF  COST  23 

and  moves  them  from  a  place-relation  in  which  they 
have  less  utility  to  one  in  which  they  have  more.  In  the 
one  case  we  are  considering  the  minuter  place-relations 
of  matter  to  other  matter  and  we  call  it  "form."  This 
kind  of  change  gives  things  the  power  to  satisfy  wants 
they  could  not  satisfy  before,  different  wants  from  those 
they  were  adapted  to  satisfy  and  so  gives  them  more 
value  than  they  had.  In  the  case  of  the  railroad  we  are 
dealing  with  the  place-relations  of  matter  to  man,  ' 
chiefly,  and  we  call  it  "place."  This  kind  of  change 
gives  things  the  power  to  satisfy  wants  of  greater  inten- 
sity than  they  could  satisfy  before,  by  putting  them 
where  those  men  can  get  at  them  who  want  them  most, 
and  so  raises  their  value.  Thus  the  two  kinds  of  pro-/  , 
duction  are  essentially  alike  ;  the  distinction  is  conven-4 
ient,  but  not  fundamental.  Indeed  we  may  note  that 
some  of  the  difficult  problems  of  manufacturers  are  con- 
nected with  the  mere  transportation  of  half-finished 
goods  from  one  operation  to  the  next.  The  great  crane 
of  a  foundry,  the  endless  belt  carriers  of  a  saw-mill, 
produce  not  form  utility  but  that  of  place  incidental  to 
the  creation  of  form  utilities. 

A  railroad  is  different  in  another  way  from  the  type  of 
manufacturing  industry,  in  that  it  sells  a  service  and  not 
the  article  to  which  its  service  has  been  attached.  The 
ordinary  factory  buys  its  necessary  materials  in  the 
market,  wherever  it  can  get  them  cheapest,  and  markets 

'  The  distinction  can  be  considered  identical  with  that  between  form 
and  place  utility.  In  the  case  of  special  machinery  moved  to  a  mine, 
or  ore  moved  to  a  smelter,  we  are  moving  matter  with  reference,  not 
to  man,  but  to  other  matter  with  which  it  is  to  be  combined.  The  men 
who  do  the  work  are  bound  to  seek  the  place  where  their  materials  can 
best  be  brought  together.  Still,  in  every  such  case  the  men  are  indis- 
pensable factors;  the  machinery  and  ore  is  being  moved  to  the  men 
who  are  to  use  it.     So  the  distinction  may  stand  as  made. 


24  LOCAL  FREIGHT  DISCRIMINATIONS  [24 

the  finished  product  as  best  it  can.  The  railroad,  on  the 
other  hand,  seldom  owns  the  "  raw  materials  "  of  its  pro- 
duction. It  merely  handles  goods  for  other  producers, 
and  charges  what  it  is  to  its  best  interest  to  charge. 
The  factory  competes  directly  with  other  factories  offer- 
ing similar  things.  The  railroad  competes  directly  with 
nobody,  for  the  most  part ;  it  must  merely  make  such 
charges  as  will  enable  its  customers  to  compete. 

The  most  oft-discussed  peculiarity  of  railroads,  how- 
ever, is  that  resulting  from  the  fact  of  production  largely 
at  "joint  cost."  For  convenience  this  term  "joint  cost" 
will  be  used  to  express  the  general  condition  in  which 
some  items  in  the  cost  of  production,  such  as  the  fixed 
charges  and  many  of  the  operating  expenses  of  railways, 
are  not  directly  assignable  to  any  single  item  or  items 
of  the  product,  whatever  that  product  may  be.  This  is 
closely  connected  with  the  policy  of  "  charging  what  the 
traffic  will  bear."  The  latter  often,  though  by  no  means 
always,  results  from  the  former,  while  the  former  is 
almost  a  necessary  condition  of  the  latter.  These  phe- 
nomena are  not  peculiar  to  railroads,  but  are  general 
throughout  the  field  of  industry.  The  manufacturer 
who  shades  the  price  or  pays  the  freight  rate  for  the 
benefit  of  his  distant  customer,  or  who  sets  widely  dif- 
ferent prices  on  different  brands  of  soap  whose  cost  of 
manufacture  is  nearly  the  same,  is  following  exactly  the 
same  law  as  is  the  traf^c  manager,  who  for  business 
reasons  sanctions  a  specially  low  freight-rate. 

The  principle  of  joint-cost  production,  as  it  has  been 
defined  above,  is  different  from  the  classical  joint-cost 
doctrine  stated  by  J.  S.  Mill, '  in  that  the  term  is  given 
the   widest   possible   interpretation.     The    case  of  "by- 

'  J.  S.  Mill,  Principles  of  Political  Economy,  Book  iii,  Chap,  xvi,  T[  i. 


25]  RAILIVAYS  AND  THE  LAW  OF  COST  25 

products,"  described  by  Mill,  then  becomes  a  special 
phase  of  the  general  problem  and  indeed  one  in  which 
the  question  to  be  settled  is  unusually  simple.  "Joint- 
cost  production  "  as  we  shall  use  the  term,  is  rather  the 
general  fact  which  Marshall  developed  with  the  introduc- 
tion of  the  well-named  distinctions  between  "  prime 
cost"  (special,  direct,  or  variable  costs),  "supplemen- 
tary costs  "  (general  or  fixed  costs)  and  "total  cost."* 
He  had  in  mind  the  fact  that  the  interest  on  the  cost  of 
a  large  plant  and  the  operating  expenses  that  are  of  a 
general  nature  are  not  due  primarily  to  any  unit  of 
product,  and  do  not  figure  in  its  "  prime  cost."  But 
they  do  figure  in  the  "  total  cost "  of  the  business,  so 
that  each  unit  must  bring  in  a  certain  quota  (supplemen- 
tary cost)  to  make  up  the  total.  In  looking  for  a  sim- 
ple term  to  apply  to  the  sums  of  these  supplementary 
expenses,  that  of  "joint-cost"  seems  the  most  available, 
in  spite  of  the  fact  that  it  has  been  used  by  J.  S.  Mill  to 
describe  the  much  narrower  concept  of  necessary  by- 
products. '     There  have  been,  in  fact,  three  stages  in  the 

'  Marshall,  Principles  of  Economics,  pp.  434-5. 

'  The  chief  objection  to  the  unqualified  adoption  of  Mill's  principle  as 
the  full  explanation  of  railway  charges  is  that  the  cases  are  not  parallel. 
Mill  describes  the  making  under  competitive  conditions  of  two  by-pro- 
ducts which  must  be  produced  in  practically  fixed  proportion  and  each 
sold  at  one  price.  But  the  products  of  a  railway's  freight  business  (ser- 
vices) are  of  very  great  technical  variety,  and  (considered  as  the  em- 
bodying of  place  utility  in  all  the  different  shipments  of  goods)  of  still 
greater  economic  variety,  and  produced  under  conditions  of  partial 
monopoly.  Moreover,  the  proportions  of  the  different  economic  goods 
(place  utilities)  that  the  railway  produces  can  be  varied  at  will.  The 
law,  then,  of  a  rather  simple  special  case  cannot  well  cover  a  more  com- 
plicated one,  even  though  it  is  a  phase  of  the  same  broad  principle. 
One  important  assumption  that  cannot  well  be  carried  over  from  the 
factory  by-product  to  the  railway  freight-rate,  is  that  competition  will 
tend  to  secure  a  total  return  just  covering  total  cost. 


26  LOCAL  FREIGHT  DISCRIMINATIONS  [26 

broadening  of  this  concept.  The  first  and  narrowest 
application  was  that  of  Mill.  He  has  in  mind  the  case 
where  production  of  one  thing  involves  necessarily  and 
with  little  or  no  extra  expense  the  production  of  other 
different  things,  or  by-products,  in  a  practically  fixed 
proportion.  For  a  given  amount  of  coal-gas,  a  definite 
amount  of  coke  is  inevitably  produced.  The  first  step 
in  broadening  this  concept  is  that  taken  by  Prof.  Taussig 
in  applying  it  to  railway  services. '  Not  only  do  these 
services  have  a  joint  cost,  but  each  has  a  considerable 
special  or  prime  cost  of  its  own,  while  the  relative 
proportion  in  which  they  are  produced  can  be  varied 
at  will — two  facts  which  were  true  of  the  older  joint- 
cost  concept  only  in  the  most  limited  way. 

Another  concept,  allied  to  that  of  joint  cost,  and  still 
more  clearly  applicable  to  the  case  of  railways,  had 
already  been  recognized  by  at  least  one  American  writer, 
General  Walker.  Although  he  did  not  give  it  sharpness 
by  the  use  of  any  special  terminology,  he  developed 
clearly  the  doctrine  that  the  existence  of  a  large  fixed 
plant  may  cause  market  price  to  differ  from  normal 
price.  For  labor  and  capital  are  thereby  committed  to 
production,  even  though  the  price  of  the  output  fails  to 
bring  in  the  normal  reward  to  their  "  efforts  and  absti- 
nence."''     In    England,    Prof.   Marshall,    in    two   books 

'See  Taussig,  "A  Contribution  to  the  Theory  of  Railway  Rates," 
Quar.  Jour.  Ec,  vol.  v,  p.  438  et  seq.,  especially  p.  454.  See,  also, 
Seligman,  ibid.,  vol.  xxi,  p.  155  et  seq. 

*F.  A-.'^zYktr ,  Politicat  Economy ,  3d  ed.,  p.  105.  Walker  here  refers 
to  the  same  doctrine  as  that  stated  in  Marshall's  "  Economics  of  In- 
dustry," which  must  have  been  in  preparation  at  that  time,  as  it  was 
not  published  until  four  years  later  than  Walker's  third  edition.  It 
must  not  be  implied  that  Walker  was  the  discoverer  of  the  distinction 
between  fixed  and  variable  expenses  and  its  results.  In  its  application 
to  railways  it  was  most  fully  developed  as  far  back  as  1850  by  Dionysius 
Lardner  in  his  Railway  Economy. 


27]  RAILIVAYS  AND  THE  LAW  OF  COST  27 

published  near  the  time  of  the  appearance  of  Prof.  Taus- 
sig's article,  presented  the  same  idea  in  a  more  developed 
form  and  with  an  apt  terminology,  which  has  already 
been  mentioned.  But  besides  this,  he  took  a  still  further 
step  toward  generalizing  the  joint-cost  concept.  For 
though  in  using  the  terms  "joint  supply"  and  "joint 
products"'  he  means  primarily  by-products,  still  he 
does  admit  railway  services  under  the  same  concept." 
For  he  holds — and  this  is  his  contribution  to  broaden- 
ing the  concept — that  in  practically  all  examples  of 
joint  products  each  item  is  chargeable  with  some  special 
expense  incurred  for  it  alone,  and  also  that  in  most  cases 
the  relative  amounts  of  the  different  products  can  be 
altered  at  will.^  He  develops  fully  and  clearly  the  nature 
and  effects  of  the  distinction  between  prime  and  total 
cost,''  and  especially  shows  by  his  treatment  that  this 
distinction  is  at  the  bottom  of  the  peculiarities  of  "joint 
cost"  production  proper. ^  The  only  difference  that  re- 
mains between  the  two  concepts  is  that  one  applies  to 
all  production  by  means  of  a  fixed  plant  or  involving 
general  expenses,  while  the  second  applies  to  the  same 
kind  of  production  only  when  several  different  kinds  of 
products  are  made.  Now  this  distinction  does  not  seem 
of  much  significance,  nor  is  it  very  hard  to  break 
through.^  All  it  rests  on  is  the  fact  that  in  the  one  case 
price-discrimination  is  unnatural  and  difficult,  while  in  the 
other  it  is  natural  and  easy.     But  the  motive  to  discrim- 

'  Marshall,  op.  cii.,  5th  ed.,  p.  388,  or  2d  ed.,  p.  436. 
^ Ibid.,  5th  ed.,  p.  392,  or  2d  ed.,  p.  440. 

^ Ibid.,  5th  ed.,  p.  390,  or  2d  ed.,  p.  438.     See,  also,  Marshall,  Econ- 
omics of  Industry,  3d  ed.,  p.  206. 

*  Marshall,  Principles  of  Economics,  pp.  434-5i  447- 

^ Ibid.,  book  v,  chap.  vii. 

"See  E.  R.  A.  Seligman,  Quar.  Jour.  Ec,  vol.  xxi,  p.  156. 


28  LOCAL  FREIGHT  DISCRIMINATIONS  [28 

inate  is  the  same  in  both  cases,  and  wherever  and  when- 
ever it  becomes  possible  to  discriminate  between  differ- 
ent units  of  a  uniform  product,  there  will  be  discrimi- 
nation, just  as  if  its  products  were  of  different  kinds, 
and  produced  at  "joint  cost."  A  cigarmaker  may  make 
only  one  kind  of  cigars,  but  he  has  only  to  christen  them 
by  a  different  name  in  order  to  sell  them  at  widely  dif- 
ferent prices.  An  oil  company  might  sell  only  one  kind 
of  illuminating  oil,  and  yet  as  between  widely  distant 
markets  it  could  make  the  widest  discriminations.  The 
essential  thing  is  the  motive  to  discriminate. 

The  final  step,  merging  the  concept  of  prime  and  total 
cost  with  that  of  joint  cost  was  expressed  in  Seligman's 
"Principles  of  Economics"  and  became  the  subject  of  a 
short  controversy  between  the  author  and  Professor 
Taussig. '  The  chief  point  at  issue  seems  to  be  whether 
it  is  proper  to  apply  the  law  of  joint  cost  to  a  plant  pro- 
ducing a  homogeneous  output  as  well  as  to  one  whose 
output  is  of  several  kinds.  Professor  Taussig's  reason 
for  excluding  the  one-commodity  plant  is  his  belief  that 
in  such  a  case  price  discrimination  between  units  of  out- 
put cannot  occur  except  there  be  a  monopoly.  In  this 
Taussig  is  in  agreement  with  Walras, '  who  develops  the 
idea  that  it  is  monopoly  that  breaks  down  the  one-price 
system  and  introduces  the  practice  of  grading  the  price 
of  a  single  good  or  service  according  to  the  strength  of 
the  customer's  demand.  But  Walras  differs  from 
Taussig  in  that  he  considers  the  classification  of  freight 
an  example  of  this  monopoly  policy ;  while  Taussig  has 
separated  the  practice  of  classification,  which  he  con- 
siders a  joint-cost  phenomenon  fundamentally,  from  those 

'Seligman,  Principles  of  Economics,  pp.  251-2,  625-6.     Quar.  Jour 
Ec,  vols.  XX,  p.  622;  xxi,  pp.  151-161. 

•Walras,  Rtudes  d'  Eiconomie  Politique  Appliquee,  p.  203. 


29]  RAILWAYS  AND  THE  LAW  OF  COST  29 

discriminations  in  railway  rates,  which  are  the  combined 
result  of  joint-cost  production  and  partial  monopoly. ' 
This  point  of  issue  has  been  already  treated,  and  grounds 
shown  for  including  the  making  of  a  single  commodity 
in  the  joint-cost  concept. 

Another  point  brought  into  the  discussion  is  the  pro- 
priety of  saying  that  railway  rates  are  governed  by  the 
"  law  of  joint  cost."  With  regard  to  this  it  seems  es- 
tablished that  such  an  expression  is  inexpedient.  The 
term  indicates  a  cost  standard  of  price.  This  cannot  be 
applied  to  single  goods,  for  single  prices  are  divorced 
from  cost  except  as  "special  cost"  forms  the  minimum 
limit  of  their  variations.  It  is  therefore  implied  in  the 
term,  as  it  is  expressed  in  Mill's  application  of  it,  that 
total  returns  tend  to  conform  to  total  cost.  But  in  the 
case  of  railroads,  whatever  may  be  the  ultimate  tenden- 
cies, there  is  undoubtedly  over  long  periods  a  wide 
divorcing,  not  only  of  unit  price  from  unit  cost  but  also 
of  total  return  from  total  cost.  Professor  Taussig  of 
course  recognizes  this,  though  he  has  assumed  the 
opposite  for  purposes  of  developing  the  railroad  applica- 
tion of  "  joint  cost,"  and  carried  the  assumption  nearly 
through  his  paper  before  dropping  it. '  But  he  expressly 
says  that  the  joint  costs  have  no  effect  on  rates  and  that 
the  total  return  is  affected  by  conditions  of  partial 
monopoly.  ^  This  being  the  case,  neither  single  rates 
nor  total  return  are  governed  by  any  cost  standard,  ex- 
cept as  a  minimum  or  point  of  departure ;  and  conse- 

^Quar.  Jour.  Ec,  p.  438  et  seq.  *  Ibid.,  vol.  v,  p.  438  et  seq. 

'See  chap,  ii  infra,  for  development  of  the  point  that  even  in  the 
general  field  of  industry  the  related  factors  of  joint  cost  and  "increas- 
ing returns  "  are  enough  in  many  cases  and  over  long  periods  to  divorce 
total  income  from  total  outgo  even  under  perfect  freedom  and  in  the 
absence  of  monopoly. 


30  LOCAL  FREIGHT  DISCRIMINATIONS  [30 

quently  the  use  of  the  word  "cost"  in  framing  the  law 
of  rates  is  misleading. 

To  sum  the  matter  up,  "joint  cost"  is  a  negative  or 
passive  principle,  giving  opportunity  and  motive  for 
price-discriminations,  but  containing  in  its  wording  no 
hint  of  the  method  those  discriminations  will  follow. 

So,  finally  it  would  seem  that  to  a  state  road  which 
adjusted  its  total  return  closely  to  its  total  outlay,  the 
term  "joint  cost"  might  well  be  applied  as  one  of  the 
laws  governing  rates.  But  as  to  the  fixing  of  rates  under 
freer  conditions,  the  term  had  better  be  avoided  in  ex- 
pressing the  law  of  charges,  and  the  compact,  if  not 
wholly  satisfactory,  "value  of  service"  used  instead. 
But  by  whatever  name  economists  may  choose  to  call  it, 
of  the  thing  itself  there  is  no  doubt,  and  especially  as  to 
its  application  to  railway  freight  charges  there  is  the 
fullest  theoretical  agreement,  on  both  sides  of  the  At- 
lantic. In  brief,  it  is  agreed  that  the  "special  costs" 
traceable  to  particular  services  constitute  a  minority  of 
the  total  outlays  of  railways,  and  that  up  to  the  point 
where  traffic  begins  to  tax  the  maximum  capacity  of  a 
well-equipped  road,  the  business  is  one  of  markedly  "in- 
creasing returns."  Each  rate  must  cover  special  cost 
and  make  some  contribution  to  the  covering  of  joint 
outlays,  the  amount  of  which  contribution  is  gauged  by 
the  value  of  the  service  or  by  what  the  traffic  will  bear 
under  the  circumstances,  considering  value  of  goods, 
competition  of  carriers  and  all  other  factors  that  may 
affect  the  problem.'     These  terms  are  somewhat  elastic, 

'Rank,  Grundzu^e des Eisenbahntarifwescns,'^^.  12-13.  Burmeister, 
Geschichtliche  Entwickelung  des  Gutertarits  der  Eisenbahnen  Deuisch- 
lands,  pp.  16-19.     Colson,  Transports  et  Tarifs,^-^.  171,  173,  174. 

In  American  works  the  doctrine  is  so  omnipresent  that  references 
are  hardly  necessary. 


31  ]  RAILIVAYS  AND  THE  LAW  OF  COST  31 

and  may  cover  a  policy  governed  by  self-interest  and 
directed  primarily  toward  the  earning  of  maximum 
profits,  or  one  where  in  the  public  interest  an  ethical 
standard  is  set  up  and  the  attempt  made  to  charge  the 
traffic  what  it  should  reasonably  bear. 

From  the  foregoing  brief  statement  the  reader  may 
have  missed  the  familiar  distinction  of  "fixed"  and 
"variable"  expenses.  It  was  omitted  to  avoid  a  possi- 
bility of  confusion.  There  are  indeed  two  ways  in  which 
one  may  classify  the  expenses  of  railroads  in  this  con- 
nection. One  may  separate  the  "general"  from  the 
"special"  expenses — that  is,  one  distinguishes  according 
as  expenses  are,  on  the  one  hand,  physically  assignable 
to  special  shipments  or  groups  of  shipments,  or  accord- 
ing as  they  cannot  be  so  specifically  assigned.  Or  one 
may  separate  the  "constant"  from  the  "variable"  ex- 
penses— those  that  are  practically  unchanged  as  trafific 
varies  from  those  that  vary  with  the  trafific.  One  writer, 
Dr.  Lorenz,  has  drawn  a  rather  fine  distinction  between 
these  two  classifications.'  He  holds  that  the  first  dis- 
tinction is  always  with  us.  It  can  never  disappear,  but 
it  becomes  less  important  as  you  take  into  account 
larger  and  larger  changes  in  the  volume  of  trafific.  The 
hauling  of  an  extra  few  hundred  pounds  in  a  car  that  is 
to  move  in  any  case  involves  little  more  expense  than 
the  actual  handling  at  the  terminals.  An  extra  loaded 
car  involves  more.  Besides  the  terminal  handling  of  the 
freight  some  extra  coal  is  burned  in  the  engine,  and 
yard-switching  must  be  added  also.  An  extra  train 
added  to  the  regular  schedule  of  the  road  involves 
almost  certainly  an  increase  of  rolling-stock,  and  also 
the  wages  of  the  train  and  engine  crew,  fuel,  oil,  caring 

*  M.  O.  Lorenz,  Quar.  Jour.  Ec,  vol.  xxi,  p,  283. 


32  LOCAL  FREIGHT  DISCRIMINATIONS  [32 

for  cars  and  engine  after  the  trip,  and,  lastly,  a  percent- 
age for  wear  and  tear  of  tracks  and  road-bed.  All  these 
are  costs  directly  traceable  to  the  regular  trainload  of 
freight.  But  there  are  still  certain  general  expenses  of 
operation,  costs  of  maintenance  not  due  to  wear  and 
tear  of  traffic  but  to  time  and  the  elements,  and  finally 
the  whole  body  of  "fixed"  charges  proper,  the  interest 
on  the  cost  of  the  permanent  investment.  All  of  these 
expenses  can  never  be  assigned  to  anything  less  than 
the  whole  traffic  of  the  road. 

On  the  other  hand,  the  second  classification  of  costs 
into  constant  and  variable,  Mr.  Lorenz  says,  disappears 
with  time  entirely.  That  is,  in  the  accounts  of  roads 
which  have  developed  through  a  considerable  period,  one 
finds  that  those  items  usually  classed  as  "constant" 
have  increased  at  least  as  fast  as  those  regarded  as  vari- 
able.^ To  this  evidence  one  might  now  add,  that  during 
the  recent  panic  and  depression  some  classes  of  expenses 
usually  considered  as  constant  fell  ofif  more  than  those 
classed  as  variable.  This  must,  however,  be  regarded  as 
a  purely  temporary  policy  of  stringent  economy,  having 
in  view  the  quick  return  of  better  times  when  the 
neglected  maintenance  could  be  more  easily  attended  to. 
It  does  not  necessarily  prove  anything  as  to  permanent 
policy.  However  that  may  be,  the  distinction  drawn  by 
Mr.  Lorenz  seems  unnecessarily  fine  for  practical  pur- 
poses. The  reason  why  "constant"  expenses  grow  is 
the  growth  of  traffic  beyond  the  capacity  of  the  existing 
plant  to  handle  economically.'  As  a  result  the  perma- 
nent investment  has  to  be  increased.  New  tracks  are 
laid,  curves  straightened,  grades  leveled,  yard  and  ter- 
minal  facilities   increased.      The   first   cost  of   all   these 

*  Quar.  Jour.  Ec,  vol.  xxi,  p.  291. 
'Colson,  Transports  et  Tarifs,  p.  171. 


33]  RAILWAYS  AND  THE  LAW  OF  COST  33 

things,  and  much  of  the  cost  of  maintenance,  comes 
under  "general"  expenses,  and  yet  they  are  incurred  not 
for  the  whole  traffic,  but  for  a  part  only,  the  increase 
which  made  them  necessary.  They  are,  then,  in  a  true 
sense,  special  to  that  increment  of  traffic  rather  than 
general  to  the  traffic  as  a  whole,  even  though  the  latter 
is  the  way  they  are  commonly  classed.  So  that  when 
one  relates  the  term  "  special "  cost  to  a  definite  incre- 
ment of  traffic  one  finds  that  it  spreads  into  more  and 
more  kinds  of  expense  in  proportion  as  the  traffic  incre- 
ment is  increased  in  size.  Any  very  large  increase  in 
traffic  does  not  tend  to  do  away  with  both  classifications 
of  expenses,  while  with  respect  to  small  variations  they 
are  both  bound  to  remain.  They  would  seem  to  express 
the  same  fact  in  a  different  way  merely.  The  distinction 
between  general  and  special  expenses  is  the  essential  fact 
in  the  case,  the  distinction  between  fixed  and  variable 
expenses  is  the  result,  showing  itself  in  the  accounts  of 
the  road. 

Possibly  the  writer  is  arguing  for  an  unusual  interpre- 
tation of  "  special  cost."  New  and  enlarged  shops,  or 
freight  depots,  increased  yard,  trackage,  or  a  reduced 
grade,  once  installed,  are  used  for  no  single  items  of 
traffic,  and  so  are  in  that  sense  general.  But  according 
to  the  interpretation  here  used,  the  increased  capital  in- 
stallment, when  incurred,  was  clearly  caused  by  a  definite 
increase  or  increment  of  traffic,  either  existing  or  ex- 
pected, and  so  was  economically  "  special  "  to  that  in- 
crement without  which  it  would  not  have  been  incurred. 
If  certain  traffic  in  soap  has  caused,  directly  or  indirectly, 
a  growth  of  expenses,  then  surely  those  expenses  have 
been  specifically  traced,  though  perhaps  by  an  indirect 
process,   to   the   soap,  and   are  "special"    to   it.'     The 

^Quar.  Jour.  Ec,  vol.  xxi,  p.  284. 


34  LOCAL  FREIGHT  DISCRIMINATIONS  [34 

adoption  of  this  interpretation  merges  at  once  the  two 
classifications  of  expenses.  Practically  all  of  them  vary 
if  the  traffic  grows  much,  and  practically  all  can  thus  be 
assigned  as  "  special  "  to  units  of  traffic  if  the  units  are 
made  big  enough. 

This  plunges  us  into  the  last  point  in  the  discussion 
of  joint-cost  production — the  factors  that  in  various  ways 
tend  to  minimize  the  distinction  between  joint  and 
special  costs,  and  to  include  in  the  cost  of  single  items 
of  traffic  a  share  of  the  general  and  fixed  expenses.  First 
comes  the  necessity  of  increasing  the  capital  investment 
when  business  grows  beyond  the  capacity  of  existing 
plants. '  Thus  the  new  traffic  involves  capital  outlay  as 
well  as  mere  "operating  expenses."  In  the  case  of  a 
railroad  this  may  mean  much  or  little.  In  the  early 
stages  of  development  or  on  branch  lines  where  traffic  is 
sparse,  a  minimum  investment  in  way  and  structures  and 
minimum  outlay  for  maintenance  may  be  far  beyond  the 
demands  of  existing  business,  and  the  growth  of  the 
plant  to  handle  increases  may  for  some  time  be  confined 
chiefly  to  the  locomotives  and  rolling-stock.  A  com- 
paratively small  increment  of  traffic  may  then  be  speci- 
fically chargeable  with  interest  on  the  cost  of  new  cars 
and  locomotives,  but  this  would  still  fall  very  far  short 
of  its  pro-rata  share  of  the  joint  expenses. 

But  as  traffic  increases  still  further  this  state  of  things 
undergoes  a  change.  Ultimately,  of  course,  there  will 
need  to  be  a  double  track,  and  joint  cost  goes  up  with  a 
jump.  But  aside  from  this,  a  fact  that  strikes  the  ob- 
server is  the  demand  for  more  or  less  continuous 
synchronized    improvements    as     traffic    expands.     The 

'Colson,  Transports  et  Tarifs,  p.  171.  Clark,  Essentials  of  Eco- 
nomic Theory,  pp.  418  1?/  seq. 


35]  RAILWAYS  AND  THE  LAW  OF  COST  35 

penalty  for  failure  to  recognize  this  fact,  being  disorgani- 
zation and  loss  of  efficiency  or  increased  expenses,  tends 
to  a  certain  extent  to  neutralize  the  law  of  "  increasing 
returns." 

The  standard  of  up-keep  is  raised,  rolling-stock  and 
rails  are  made  heavier,  trestles  also  must  be  modernized, 
longer  trains  require  larger  yards  as  well  as  more  power- 
ful locomotives,  improved  signaling  systems  are  intro- 
duced. Moreover  the  burden  on  operating  expenses 
caused  by  high  grades  and  sharp  curves  becomes  propor- 
tionately heavier  as  traffic  grows,  and  it  often  becomes 
economical  to  invest  capital  in  straightenings  and  level- 
ings,  to  reduce  the  operating  cost  per  traffic  unit.  An 
example  may  be  here  cited  '  illustrating  this  general  class 
of  facts,  of  a  road  on  which  in  ten  years  the  average  de- 
lays increased  from  two  minutes  to  one  hour  and  three 
minutes,  while  but  one  train  per  day  was  added  to  the 
schedule.  The  average  train  length,  however,  was  in- 
creased forty-five  per  cent.  The  conclusion  drawn  from 
this  case  is  that  the  bad  results  were  due  to  a  failure  to 
increase  car  capacities  and  to  re-organize  the  yard  equip- 
ment as  the  traffic  demanded.  Common  experience 
during  periods  of  extra  rapid  growth  of  traffic,  such  as 
that  preceding  the  recent  panic,  furnishes  parallel  testi- 
mony. 

All  this  means,  that  if  a  traffic  manager  has  under  con- 
sideration a  rate,  an  inter-related  schedule  of  rates  or  a 
rate  policy  that  affects  large  volumes  of  traffic,  he  must 
consider,  as  the  special  cost  of  the  traffic  he  is  valuing, 
a  large  share  of  items  usually  classed  as  general  or  con- 
stant. He  must,  in  order  to  get  an  economically  cor- 
rect  result,   prorate  part  of  his  ''joint"  operating  ex- 

'  R.  R.  Gazette,  Aug.,  1907. 


36  LOCAL  FREIGHT  DISCRIMINATIONS  [36 

penses  and  very  likely  part  of  his  "fixed  charges  "  to  the 
traffic  on  which  he  is  figuring.  There  are  various  ways 
in  which  this  massing  of  traffic  in  large  units  for  the  pur- 
pose of  valuing  it,  may  be  brought  about.  The  most 
obvious  is  that  of  classification.  The  changing  of  a  class- 
rate  involves  the  traffic  in  many  commodities  over  the 
haul  affected.  And  since  the  relation  of  the  classes  to 
each  other  is  fairly  constant,  a  considerable  change  in 
in  one  class  rate  involves  corresponding  changes  in 
the  others.  Moreover,  if  a  commodity  be  put  in  a  new 
class,  all  the  rates  on  that  commodity  are  changed  at 
once. 

Another  way  of  enlarging  the  unit  of  traffic  whose 
value  and  cost  are  estimated  in  any  one  act  of  rate-mak- 
ing is  the  practice  of  establishing  constant  relatio7is  as 
between  different  places  or  different  lengths  of  haul  on 
the  line.  The  adoption  of  any  kind  of  a  distance-scale 
accomplishes  this  result.  If  a  road  has  adopted  a  dis- 
tance-scheme for  its  local  traffic,  then  in  considering  a 
change  of  rates  it  is  valuing  that  whole  local  traffic  in 
one  lump.  In  figuring  whether  the  new  rates  would  be 
good  financial  policy  the  road  must  charge  against  the 
traffic  as  its  "  special  cost "  every  expense  that  can  in 
any  way  be  causally  traced  to  the  local  freight  traffic. 
This  means  that  large  items  of  maintenance,  interest  on 
cost  of  rolling-stock  and  structures,  etc.,  etc.,  must  be 
included.  The  trunk  line  percentage  rate  system,'  in 
which  the  New  York-Chicago  rate  is  used  as  a  base  and 
class  rates  on  intermediate  hauls  fixed  at  constant  per- 
centage of  the  base-rate,  is  an  example  of  such  a  scale. 

'See  W.  Z.  Ripley,  "The  Trunk-Line  System:  a  Distance  TariflF," 
Quar.  Jour.  Ec,  1906,  p.  183.  Also  L.  G.  McPherson,  Railroad 
Freight  Rates,  pp.  70-78.  Also  Emory  R.  Johnson,  in  his  latest  book, 
not  yet  out,  but  loaned  to  the  writer  in  galley  form. 


37]  RAILWAYS  AND  THE  LAW  OF  COST  37 

By  this  scheme  one  operation  of  rate  making  fixes  the 
charges  made  for  large  volumes  of  traffic  to  and  from 
many  different  points. 

But  in  the  great  mass  of  commodity  rates  there  is  not 
very  much  scope  for  such  groupings.  There  is,  of 
course,  no  classification  grouping  to  be  considered ;  and 
as  most  of  the  commodity  traffic  is  "through,"  there  is 
little  application  of  distance  scales.  The  unit  here  valued, 
the  traffic  covered  by  a  single  rate,  is  that  of  one  com- 
modity only,  from  one  point  or  limited  group  of  com- 
mon points  to  another  such  point  or  group.  It  is,  then, 
in  most  cases  a  relatively  small  traffic  unit,  in  spite  of 
the  tremendous  aggregate  volume  of  the  commodity 
traffic.  Is  it,  then,  economically  correct  to  consider 
such  rates  profitable  and  economically  correct  down  to 
the  point  where  they  cover,  in  separate  cases,  only  a  bare 
margin  above  the  special  costs  of  the  traffic  that  moves 
under  each  separate  rate?  For  example,  let  there  be  ten 
stations  on  the  line,  from  each  of  which  ten  unclassified 
commodities  may  be  induced  to  move  to  a  central 
market.  Here  are  one  hundred  separate  commodity 
rates  to  be  fixed.  If  the  road  figures  on  each  rate  sep- 
arately, perhaps  only  a  couple  of  carloads  a  week  are  in- 
volved in  each  adjustment,  and  the  special  cost  is  very 
slight,  including  only  labor  of  loading  and  unloading  and 
of  switching  the  cars,  and  an  allowance  for  extra  cost  of 
fuel  and  oil,  and  a  slight  allowance  toward  maintenance, 
to  make  good  the  trifling  extra  wear  on  the  roadbed. 
The  whole,  for  a  haul  of  any  distance  would  be  easily 
less  than  one  mill  per  net  ton  per  mile.  Now  the  ques- 
tion is,  if  it  were  necessary  to  attract  the  traffic,  could 
the  road  afford  to  bid  down  to  that  level  for  it?  Many 
presentations  of  this  subject  seem  to  imply  that  it  could, 
but  the  answer  of  railway  practice  is  that  it  could  not  and 


38  LOCAL  FREIGHT  DISCRIMINATIONS  [38 

would  not  go  anything  like  so  far,  except  under  special 
and  temporary  circumstances  where  something  beside 
the  income  from  that  particular  traffic  was  at  stake. 

For  it  goes  almost  without  saying  that  such  a  policy, 
applied  to  each  of  the  ten  stations  and  ten  commodities, 
would  result  in  the  road's  handling  the  whole  trafific  at 
less  than  its  special  cost.  For  the  result  would  be 
almost  certainly  a  train  a  day  added  to  the  schedule,  with 
the  purchase  of  new  rolling-stock  and  possibly  some  en- 
largements of  structures,  all  of  which  outlays  become  a 
charge  on  the  new  traffic,  which  must  earn  interest  on 
their  cost.  And  if  the  number  of  stations  and  commod- 
ities were  multiplied,  there  would  be  still  more  important 
sections  of  the  fixed  charges  traceable  to  this  low-grade 
trafific  as  a  whole.  Thus  it  is  conceivable  that  in  follow- 
ing out  too  freely  the  oft-expounded  principle  of  bidding 
down  to  marginal  (special)  cost  for  marginal  shipments, 
a  traffic  would  be  developed  which  would  fail  to  cover 
the  out-of-pocket  expenses  it  occasioned  and  so  would 
truly  be  carried  at  a  loss. 

All  this  means  is,  that  in  applying  the  principle  of 
marginal  cost  to  this  case,  the  single  shipment  is  not  the 
correct  marginal  unit.  Rather,  the  marginal  unit  is  the 
whole  of  the  lowest  grade  traffic,  meaning  that  trafific 
which,  because  of  distance,  competition,  or  the  cheap- 
ness of  the  goods  themselves,  contributes  the  least 
toward  the  more  general  expenses.  Under  ordinary 
circumstances  this  trafific,  taken  together,  forms  a  very 
large  tonnage,  and  to  it,  according  to  the  principle  de- 
veloped above,  a  considerable  share  of  fixed  charges  and 
general  operating  expenses  (though  not  a  full  pro-rata 
share)  must  be  assigned.  This  concept  is,  on  its  face, 
decidedly  indefinite,  and  must  needs  be  so;  but  it  ex- 
presses a  real  fact,  and  one  to  which  trafific  managers 


39]  RAILWAYS  AND  THE  LAW  OF  COST  39 

give  effect  by  prorating  to  their  lowest-grade  traffic  a 
material  share  of  joint  costs.  Thus  the  practice  of  pro- 
rating fixed  charges  and  "constant"  or  general  operat- 
ing expenses  does  not  run  counter  to  the  theory  of 
general  and  special  costs,  as  it  might  seem  to  do,  but  if 
properly  handled  it  may  be  the  only  practicable  way 
of  making  sure  that  the  marginal  traffic  really  earns  its 
keep.  Of  course,  no  accountants  could  devise  a  prorat- 
ing system  that  would  do  all  this  with  absolute  accuracy ; 
but  a  good  working  approximation,  with  a  slight  margin 
on  the  safe  side,  is  easily  possible.  And  in  accordance 
with  this  we  have  the  fact,  recognized  by  the  better 
organized  railway  systems,  that  a  thorough,  detailed  and 
live  system  of  cost-accounting  is  prerequisite  to  the  in-  / 
telligent  carrying  out  of  the  policy  of  charging  what  the  | 
traffic  will  bear. 

And  this  helps  to  dispose  of  a  criticism  of  the  policy  of 
foreign  state  roads,  to  the  effect  that  they  ignore  to  a 
large  extent  the  law  of  marginal  cost  by  their  extensive 
use,  in  cost  calculations,  of  averages  of  the  operating 
cost  of  the  traffic  as  a  whole,  so  failing  to  make  the  most 
efficient  use  of  their  capacity.  Without  denying  the 
latter  statement,  this  much  may  be  said ; — though  valua- 
tion by  averages  is  inconsistent  with  proper  valuation  of 
marginal  increments  in  enterprises  of  diminishing  returns, 
we  have  seen  that  they  are  not  entirely  inconsistent  in 
businesses  of  joint-cost  and  increasing  returns,  but  that 
on  the  contrary  a  certain  amount  of  averaging  is  neces- 
sary for  accurate  marginal  valuation.  Granting  this, 
then,  the  foreigner  with  his  averages  may  possibly  be 
not  much  farther  from  the  truth  of  the  matter  than  a 
practical  man  who  would  say  offhand  that  all  rates  were 
profitable  provided  each  covered  the  evident  special 
cost  of  the  particular  shipments  to  which  that  rate  itself 
was  applied. 


CHAPTER  II 

PLACE    OF    RAILWAY    COMPETITION    IN    THE    GENERAL 
COMPETITIVE    SYSTEM 

The  following  paragraphs  present  in  the  briefest  pos- 
sible form  an  analysis  of  competitive  disturbances  with 
an  attempt  to  differentiate  them  systematically  according 
to,  first,  the  economic  situation  of  the  competing  unit, 
and,  second,  the  nature  of  the  product  about  which  com- 
petition centers.  The  purpose  of  such  an  analysis  is  to 
throw  light  on  the  nature  of  dynamic  friction,  and  on 
the  question  whether  it  can  under  any  circumstances  be- 
come a  permanent  obstruction  to  static  forces.  The 
significance  of  this  study  can  of  course  not  be  over- 
emphasized, since  it  bears  on  the  general  question 
whether  strict  regulation  of  the  foreign  type  is  neces- 
sary, or  whether  it  is  enough  to  correct  the  worst  single 
abuses,  and  to  free  the  proper  and  beneficent  economic 
forces  from  the  interference  of  forces  of  the  opposite 
kind.  For  brevity,  the  analysis  is  thrown  into  outline 
form. 

First.  Competition  ensures  a  tendency  to  equal  re- 
wards as  between  competing  units  at  a  level  not  perma- 
nently below  that  of  cost.  Each  competitor  is  concerned 
with  the  relation  of  his  total  receipts  to  his  total  outlay, 
and  these  tend  to  be  equal.  Each  single,  distinct  eco- 
nomic process  tends  to  produce  value  equal  to  its  cost. 

Second.  This  requires  that   each  unit  of  the  product 

should  bring  in  enough   to   pay  the  cost  for  which  that 
40  [40 


OF   THE 

UWIVERSITY 

OF 


41]  RAILWAY  COMPETITION  ^I 

unit,  itself  and  individually,  is  responsible.  Where  joint 
cost  is  absent,  it  makes  no  difference  whether  one  enter- 
prise produces  many  things  or  whether  the  same  things 
are  produced,  each  by  a  separate  entrepreneur.  Each 
separate  economic  process  still  tends  to  earn  what  it 
costs  though  many  are  combined  under  one  manage- 
ment. 

Third.  Where  joint-cost  exists,  the  costs  of  an  un- 
dertaking can  no  longer  be  subdivided  in  this  simple 
way.  The  whole  cost  is  no  longer  represented  by  the 
sum  of  the  special  costs.  If  items  of  product  earn  only 
their  individual  cost,  the  whole  business  is  run  at  a  loss, 
for  the  joint  costs  are  not  covered.  While  if  the  whole 
cost  is  covered,  the  outlays  on  joint  account  must  be 
arbitrarily  allotted.  The  latter  alternative  is  what  in  the 
long  run  tends  to  happen.  Hence  competition  does  not 
control  the  ascribing  of  reward  to  various  productive 
agents  within  the  competing  unit. 

A.  A  business  carried  on  largely  at  joint  cost  is  a 
business  of  increasing  returns,  within  certain  limits.  If 
the  plant  has  some  capacity  unused,  it  is  easy  to  see  that 
it  is  more  wasteful  than  if  there  were  no  such  unused 
capacity.  And  to  get  the  greatest  efficiency  possible,  a 
plant  must  be  big  enough  to  combine  the  productive 
factors  in  the  best  possible  proportions.  When  this 
point  is  reached,  the  business  ceases  to  be  one  of  "in- 
creasing returns,"  and  the  resulting  special  motive  to 
expansion  ceases.  But  this  does  not  straighten  out  the 
bookkeeping  difficulties  caused  by  the  joint-cost  feature. 

B.  When  businesses  of  increasing  returns  compete 
with  each  other,  the  practice  arises  of  cutting  rates  to 
attract  new  custom  while  keeping  up  the  general  level  of 
prices.  This  is  discrimination  between  customers : 
"dumping"  is  a  name  that  describes  it  rather  well.     If 


42  LOCAL  FREIGHT  DISCRIMINATIONS  [42 

it  is  done  by  all  the  competitors  at  once  it  is  an  economic 
waste,  and  leads  to  "  cut-throat "  competition.  This 
forces  the  total  returns  below  the  cost  level. 

C.  It  is  evident  that  such  a  condition  occurs  only  when 
the  capacity  of  the  existing  means  of  producing  goods 
is  greater  than  is  justified  by  the  demand.  This  cannot 
happen  permanently,  however ;  the  low  level  of  cost  will 
increase  the  demand  until  finally  we  reach  the  limit  of 
the  capacity  of  the  plants  to  expand  with  decreasing 
cost.  At  this  point  the  violent  underbidding  for  mar- 
ginal custom  begins  to  diminish,  and  the  prices  tend  to 
rise  as  the  demand  expands  still  further.  This  rise  in 
prices  is,  however,  in  most  cases  limited  to  something 
near  a  cost  level  by  potential  competition.  A  consider- 
able profit  might,  it  is  true,  be  retained  ;  for  men  do  not 
usually  build  big  new  plants  unless  those  already  in  the 
business  are  earning  extra  good  returns,  so  as  to  afford 
them  a  decided  inducement  to  enter  the  field.  But  if 
the  earnings  of  the  plants  in  the  business  become  very 
large,  new  plants  will  be  built,  for  purposes  of  industrial 
blackmail  if  not  for  legitimate  competition. 

D.  While  the  condition  of  increasing  returns  lasts,  and 
the  tendency  to  cut-throat  competition  is  strong,  it  is  to 
the  interest  of  all  enterprises  to  prevent  it  in  any  way 
possible.  Where  the  product  in  question  is  fairly  homo- 
geneous, as  in  the  case  of  a  flour  mill  or  a  woolen  mill, 
the  extension  of  the  one-price  principle  forms  a  very 
good  means  of  drawing  the  line  between  fair  competition 
and  that  which  "spoils  the  market."  '  Under  this  prin- 
ciple, each  unit  of  a  homogeneous  product  is  charged 
with  the  same  share  of  joint-cost  outlays.  This  equal 
prorating,  however,  does  not  stand  as  inherently  logical 

'Marshall,  Principles  of  Economics,  sth  ed.,  p.  375. 


43]  RAILWAY  COMPETITION  43 

in  itself.     It  rests  rather  on  the  business  necessity  for 
some  such  Hmitation. 

E.  Where  the  product,  instead  of  being  homogeneous, 
is  very  heterogeneous,  any  such  simple  limitation  as  has 
just  been  described  is  bound  to  fail.  In  such  cases,  if 
the  condition  of  increasing  returns  lasts  any  length  of 
time,  direct,  active  competition  becomes  distintly  uneco- 
nomical and  the  chances  are  very  great  that  it  will  be 
done  away  with  entirely.  Potential  competition  will 
then  be  the  only  governor  of  prices.  This  to  a  consid- 
erable extent  is  true  of  business  conditions  today.  In 
the  case  of  railroads  potential  competition  is  not  very 
efficient,  but  other  forces,  generalized  under  the  caption 
of  "market  competition  "  are  claimed  to  have  the  same 
efifect. 

F.  But  it  is  only  direct  competition  that  can  regulate 
the  prices  of  all  the  single  articles  in  a  composite  prod- 
uct. Even  when  the  capacity  of  a  producer  is  fully  util- 
ized so  that  further  production  would  not  fall  under  the 
law  of  increasing  returns,  still  the  fact  of  producing  at 
joint-cost  would,  within  limits,  allow  considerable  discre- 
tion as  to  the  manner  of  sharing  the  existing  general 
costs.  Potential  competition  and  market  competition  in 
its  more  general  form  if  not  in  all  cases,  leave  such  dis- 
cretion in  the  hands  of  the  "competitor";  that  is,  these 
forms  of  competition  fail  as  regulators  of  prices  in  de- 
tail. 

We  have  now  in  efifect  made  a  simple  classification  of 
the  fundamental  phenomena  of  joint-cost  competition, 
which  can  be  presented  in  tabular  form. 


44 


LOCAL  FREIGHT  DISCRIMINATIONS 


[44 


COMPETING  UNIT 

PRODUCT 
HOMOGENEOUS 

PRODUCTS 
HETEROGENEOUS 

Producer  in  whose  pro- 
cess joint-cost  is  neg- 
ligible. 

Each    unit    earns   its 
own  cost. 

Each  unit  earns  its 
own  cost. 

Producer  under  the  law 
of  joint-cost  and  in- 
creasing returns. 

Temptation    to    cut- 
throat competition 
easily  restrained  by 
the     sentiment     of 
producers   and   the 
one-price  principle. 

Active  competition  runs 
almost  inevitably  into 
cut-throat  competi- 
tion, bringing  gen- 
eral price-level  below 
cost.  This  competi- 
tion tends  to  destroy 
itself. 

Producers    under     the 
law  of  joint-cost,  but 
working  near  maxi- 
mum    efficiency    so 
that    increasing    re- 
turns are  no  longer 
important. 

Temptation    to    cut- 
throat competition 
removed.          Joint 
costs    naturally  as- 
signed pro  rata,  as 
in  the  case  above. 

General  price-level 
tends  to  equal  that  of 
cost.  Joint-cost 
items  imputed  to 
units  of  product  at 
discretion  of  entre- 
preneur. 

All    the   producers   in 
the  district  served  by 
a  single  railroad  sys- 
tem. 

General  level  of  rail- 
roads' charges  tends 
to  be  lower  than  mo- 
nopoly price.  Dis- 
criminations between 
different  shippers  not 
removed.  Beyond 
this,  data  insufficient 
for  simple  generali- 
zation. 

Can  we  pigeon-hole  the  railroad  in  the  above  scheme 
satisfactorily?  It  certainly  falls  in  the  two  divisions  that 
deal  with  joint  cost  and  increasing  returns.  But  to 
argue  about  the  railroad,  and  to  deal  with  it  merely  as  a 
large  manufacturing  business  producing  a  very  hetero- 
genous product  under  conditions  of  joint-cost  and  of  in- 
creasing returns  unusually  long-continued — such  a  con- 


^c]  RAILWAY  COMPETITION  45 

ception,  while  allowing  for  many  of  the  peculiarities  of 
railway  economics,  is  still  inadequate.  There  are  still 
further  departures  from  type  for  which  allowance  must 
be  made,  and  which  have  yet  to  be  thoroughly  thrashed 
out  in  the  field  of  economic  discussion  and  controversy. 
By  this  is  meant  the  "competition  of  markets"  principle 
as  applied  to  railways,  a  principle  which  is  certainly  dif- 
ferent in  its  workings  from  typical  competition,  not  only 
in  degree,  but  in  kind.  This  term  is  applied  to  the  com- 
petition of  two  or  more  roads  for  the  privilege  of  carry- 
ing to  a  common  market  goods  produced  on  their  re- 
spective lines,  a  kind  of  competition  in  which  the  railroad 
and  the  producer  co-operate. 

We  have  here  the  last  and  greatest  extension  in  com- 
peting units  which  we  must  add  to  our  scheme  of  varia- 
tions from  the  competitive  type.  For  the  competition 
which  governs  railway  rates  is  now  [the  competition  in 
ultimately  marketing  the  goods  which  the  railroad  car- 
ries. In  this  the  roads  themselves  are  not  directly  in- 
volved, and  those  who  are  directly  involved  are  legion. 

In  the  future  competition  of  railways,  if  competition 
we  are  to  have  at  all,  the  competing  unit  will  be,  not 
the  single  line,  not  even  the  large  railway  system,  but 
more  broadly  the  whole  economic  system  of  the  section 
which  a  great  railroad  system  serves.  If  this  broader 
competition  of  which  I  have  spoken,  is  strong  enough 
to  count  as  a  regulator  of  charges,  this  means  that  rail- 
road competition  as  such  is  merged  in  the  sectional  com- 
petition of  industry  and  enterprise  as  a  whole.  This 
competition  centers  in  transportation  services  and  the 
charges  made  for  them,  but  these  must  always  be  con- 
sidered as  parts  only  of  the  services  which  are  competing; 
carrying  must  be  studied  as  a  very  important  incident  in 
this  broader  competitive  process. 


46  LOCAL  FREIGHT  DISCRIMINATIONS  [46 

To  return  to  our  original  classification  of  variations 
from  type,  it  will  be  rerrtembered  that  the  third  kind  of 
competitor  was  a  firm  producing  largely  at  joint  cost 
but  at  or  near  the  point  of  maximum  efficiency,  so  that 
the  feature  of  increasing  returns  was  no  longer  import- 
ant. In  such  an  industry,  where  the  product  is  hetero- 
geneous, the  total  return  tends  approximately  to  equal 
total  cost,  but  no  principle  of  uniformity  is  clearly  in- 
volved by  which  the  items  of  joint  cost  are  imputed  to 
items  of  product.  Now  let  us  add  one  more  to  our  list 
of  competing  units,  one  exactly  like  the  last,  except  that 
instead  of  the  words  "  single  firm "  we  write  "  the 
totality  of  all  producing  interests  within  the  section  of 
country  served  by  a  single  railway  system."  The  rail- 
road then  becomes  a  mere  incident — a  delivering  agent, 
if  you  will — for  the  true  competing  interests.  It  is  a 
very  important  servant  to  the  more  fundamental  indus- 
tries back  of  it.  Under  such  conditions  the  problem  of 
value  becomes  more  complicated  than  ever. 

For  ^/le  co7npeti7ig  unit  we  are  studying  is  no  lojiger 
a  single  economic  personality ,  but  is  made  up  of  number- 
less and  entirely  independent  interests.  These  interests 
are  not  unified;  they  are  competing  with  each  other  as 
well  as  with  those  outside.  They  do  not  consciously 
co-operate  in  the  slightest  degree.  Their  only  tie  of 
union  for  the  purpose  in  hand  is  the  fact  that  in  their 
individual  competition  with  interests  outside  their  sec- 
tion they  are  all  dependent  on  the  same  great  delivering 
agent,  the  railroad  system  to  which  their  territory  is 
tributary.  It  is  as  if  within  a  great  factory  we  had  many 
independent  producers  working,  and  one  set  who  at- 
tended to  the  business  of  carrying  things  from  process 
to  process  and  from  group  to  group  within  the  factory 
and   also  delivered  all   products   to  customers   outside. 


47]  RAILWAY  COMPETITION  47 

This  latter  set  of  workers  have  a  monopoly  of  this  carry- 
ing business  in  the  "factory"  and  charge  the  others  for 
their  services  as  much  as  they  can  get,  tn  the  long  run. 
Now  the  limitations  on  what  this  carrying  monopoly 
can  charge  are  on  the  whole  rather  strict.  In  the  first 
place,  the  other  producers  in  the  factory  are  all  produc- 
ing under  competitive  conditions.  Some  of  them,  it  is 
true,  have  important  special  advantages,  but  on  the 
whole  they  are  about  holding  their  own.  In  the  second 
place,  many  of  the  producers  are  free  to  leave  the  fac- 
tory, if  they  do  not  prosper  there,  and  set  up  in  business 
elsewhere,  while  the  carrying  group  are  tied  to  their 
places,  practically  for  good.  If  any  considerable  exodus 
of  workers  should  take  place,  they  could  only  grin  and 
bear  the  loss.  Finally,  to  complete  the  essential  analogy 
and  make  it  correspond  more  closely  to  American  con- 
ditions, we  must  imagine  business  in  general  to  be  in- 
creasing rapidly.  New  entrepreneurs  are  constantly 
coming  into  the  field  and  looking  for  a  place  to  set  up 
their  business,  and  they  will  naturally  settle  in  that  fac- 
tory where  they  think  they  can  be  most  prosperous. 
Other  things  being  equal,  they  can  prosper  best  in  that 
factory  in  which  the  carrying  group  will  bring  them  their 
material  and  deliver  their  products  at  the  lowest  cost. 
Prospective  transportation  charges  are  one  of  the  most 
important  elements  in  deciding  the  location  of  new  busi- 
nesses. Thus  the  carrying  group  is  seen  to  be  the 
largest  single  group  in  the  factory  which  it  serves,  while 
its  interest  is  bound  up  with  the  general  prosperity  of 
this  factory ;  and  it  even  bids  pretty  directly  by  offers  of 
low  rates  for  the  patronage  which  can  be  given  by  new 
producers.  But  the  fact  must  never  be  lost  sight  of 
that  it  is  these  other  producers  who  do  the  real,  direct 
competing. 


48  LOCAL  FREIGHT  DISCRIMINATIONS  [48 

If  two  of  these  peculiar  factories  are  of  about  the  same 
general  efificiency,  that  one  will  be  the  most  prosperous 
in  which  the  charges  of  the  carrying  group  are  the 
lowest,  on  the  whole.  If  the  carriers  lower  their  charges 
to  any  producer,  they  place  him  in  a  better  competitive 
position,  in  which  his  output  tends  to  be  greater  than  it 
would  otherwise  have  been,  thus  providing  more  business 
for  the  carrier.  On  the  other  hand,  if  a  producer  is 
made  to  pay  a  higher  rate  than  his  competitors,  his  busi- 
ness will  tend  to  dwindle,  and  the  carriers  will  probably 
stand  to  lose  more  than  they  can  gain  by  the  high  rate. 
If  he  is  forced  out  of  business  entirely,  the  carriers  lose 
all  the  profit  they  could  have  gotten  out  of  his  business, 
with  no  compensating  gain.  To  keep  themselves  in 
business,  they  must  keep  producers  in  business  in  their 
territory,  and  keep  the  business  of  these  producers  up  to 
a  maximum  volume — otherwise  they  stand  to  lose  their 
own  patronage  and  so  to  default  the  interest  on  the  in- 
vestment already  permanently  sunk  in  their  business; 
and  if  general  competition  is  sharp,  this  appears  to  be  a 
sufficient  inducement  to  keep  rates  as  near  a  cost  level, 
on  the  whole,  as  are  those  in  other  businesses. 

That  is  on  the  assumption  that  the  competing  sys- 
tems are  on  about  an  equal  footing  of  efficiency.  If  one 
is  markedly  less  efficient,  on  the  whole,  than  its  rivals, 
we  have  a  modification  of  the  problem.  The  disadvan- 
tage may  in  the  first  place  be  one  that  is  not  likely  to 
last,  but  rather  to  disappear  under  proper  management. 
In  this  case,  the  carriers  can  well  afford  a  temporary 
loss  for  the  sake  of  helping  their  customers  over  the 
period  of  weakness,  until  such  time  as  they  can  stand  on 
their  feet  and  pay  a  fair  price  for  their  carrying.  If  the 
carriers  act  fairly  and  wisely  in  this  matter,  they  hurt 
nobody  and  in  the  end   help  everybody.     They  merely 


49]  RAILWAY  COMPETITION  49 

assume  the  burden  of  forcing  an  adjustment  of  things 
which  will  ultimately  turn  out  to  be,  in  a  general  way, 
the  natural  one  and  best  for  every  one  concerned. 

This  represents,  in  a  most  broad  and  general  way,  the 
state  of  things  in  an  undeveloped  section  of  country ;  but 
of  course  it  fails  to  allow  for  many  very  important 
features  of  the  situation.  To  mention  only  one,  every- 
body concerned  in  opening  up  new  countries,  and  es- 
pecially the  railroads,  are  getting  their  rewards  for  some 
time  not  so  much  from  their  own  productive  activity  as 
from  a  general  increase  in  the  value  of  property  in  whch 
they  have  invested.  This  brings  in  a  possible  motive  to 
discrimination  which  the  railway  exponents  of  the 
broader  competition  doctrine  w^ould  like  to  ignore.  The 
whole  question  will  be  discussed  more  in  detail  later  on. 

So  much  at  present  for  a  section  which  is  only  tem- 
porarily below  standard  of  efficiency.  But  it  may  hap- 
pen that  one  of  our  allegorical  factories  is  permanently 
handicapped  by  location  or  other  cause,  and  so  is  placed  at 
a  disadvantage  that  can  never  be  fully  made  good.  In 
this  case  both  carriers  and  producers  must  be  content 
with  less  than  the  usual  return,  and  the  permanent  in- 
vestment of  the  carriers  in  franchise  and  plant  or  what 
not,  may  suffer  a  shrinkage  in  value.  Always  assuming 
competition  to  be  very  sharp,  the  carrying  agency  can 
no  longer  permanently  earn  full  interest  on  this  fund 
which  it  has  sunk  in  its  business.  But  down  to  the 
point  where  it  cannot  cover  its  actual  out-of-pocket  ex- 
penses of  operation,  it  will  stay  in  business  and  pocket  a 
partial  loss  of  its  property.  As  long  as  the  original  in- 
vestment is  worth  anything  at  all '  in  the  use  it  was  de- 

'This  ignores,  of  course,  the  value  of  a  plant  for  an  alternative  use,  a 
factor  which  in  the  railway  problem  is  fairly  negligible. 


50  LOCAL  FREIGHT  DISCRIMINATIONS  [50 

signed  for,  it  will  be  so  used,  and  will  be  valued  only 
for  what  it  is  actually  worth  in  earning  power.  If  this 
is  all  that  happens — if  the  process  goes  no  farther — it  is 
entirely  justifiable  on  economic  grounds  and  works  no 
undue  harm  to  anyone.  It  is  a  form  of  bankrupt  com- 
petition, but  one  in  which  there  is  little  danger.  The 
risk  of  its  developing  into  general  cut-throat  competi- 
tion need  not  be  thought  of,  for  the  other  carrying  sys- 
tems are  so  much  better  off  that  they  need  not  be  forced 
into  any  such  destructive  policy.  This  represents  the 
situation  of  a  section  that  is  being  left  behind  econom- 
ically, or  is  relatively  somewhat  inacessible,  like  New 
England.  Of  course,  in  making  such  an  application  the 
simple  situation  of  the  allegory  becomes  complicated  in 
many  ways.  The  interference  of  social  and  sentimental 
considerations  must  be  largely  taken  into  account  in 
more  detailed  study. 

We  have  gone  about  as  far  as  is  profitable  with  the 
study  of  a  hypothetical  industrial  form  analogous  to  the 
general  railway  situation.  We  have  revealed  a  tendency 
of  the  general  level  of  rates  toward  cost,  independent  of 
the  direct  form  of  railway  competition,  provided  our  var- 
ious railway  systems  remain  separate  in  interest  and  so 
competitive  in  spirit.  Of  course,  if  the  carrying  agen- 
cies in  our  illustration  had  formed  a  union,  the  whole 
argument  would  have  fallen  through.  To  prevent  any 
such  monopoly  from  being  established,  we  must  trust  to 
legislative  opposition  backed  by  popular  conviction,  and 
also  at  present  to  the  personal  individualities  of  the 
strong  men  at  the  heads  of  our  big  systems  and  their 
attachment  to  their  systems  as  their  personal  achieve- 
ments, leading  naturally  to  an  unwillingness  to  merge. 
We  have  reached  then  only  a  most  general  conclusion. 
The  more  detailed  problems,  which  are  after  all  the  most 


5 1  ]  RAIL  WA  Y  COMPETITION  5  X 

significant — those,  namely,  of  relative  rates  within  the 
systems — demand  a  more  concrete  study.  It  is  hoped 
that  the  principles  of  the  foregoing  discussion  may  be 
found  to  be  suggestive  as  to  the  nature  of  dynamic  dis- 
turbance and  friction  in  the  problem  before  us.  At  least 
they  will  have  tended  to  show  that  in  the  "  competition 
of  markets "  argument  we  are  stirring  up  something 
radically  new  in  applied  economics.  The  economic 
motive  is  working  here  through  intricate  processes 
which  demand  thorough  concrete  study  to  square  them 
with  the  principles  drawn  from  less  involved  cases.  The 
claim  is  made  that  "  competition  of  markets  "  ensures  a 
general  cost  level  of  rates,  while,  as  it  is  not  localized  at 
junction  points,  it  is  free  from  the  motive  to  harmful 
discriminations  which  vitiated  the  workings  of  direct 
competition.  This  claim  must  be  examined  as  minutely 
as  possible  and  in  a  thoroughly  impartial  frame  of  mind. 


CHAPTER  III 

"  VALUE  OF    SERVICE  "  AS    A    STANDARD    OF    REASONABLE- 
NESS UNDER  FREE  CONDITIONS. 

In  discussing  theories  of  actual  rate-fixing,  it  is  first 
in  order  to  take  up  the  above  overworked  and  all-inclu- 
sive phrase  with  a  view  to  formulating  its  meaning  more 
exactly.  And  not  least  important  is  the  statement  of 
what  it  does  not  mean. 

"  Value  of  service  "  and  "  charging  what  the  traffic 
will  bear  "  are  constantly  used  by  practical  men  as  suffi- 
cient grounds  for  the  practices  followed  in  actual  rate- 
making.  But  the  principle  is,  after  all,  quite  indefinite. 
Taken  alone  as  an  explanation  of  rates  it  does  little  more 
than  to  base  rates  for  the  most  part  on  themselves  and 
on  each  other. 

The  phrase  as  used,  especially  if  the  term  "  economic  " 
is  included,  suggests  control  by  natural  laws,  an  involun- 
tary bowing  to  irresistible  outside  forces,  and  an  inevit- 
ableness,  which  are  for  the  most  part  fictitious.  A  rail-  .. 
way  rate  is  a  price,  and  so  is  a  phase  of  value ;  but  when 
one  has  said  this  he  has  not  begun  to  study  the  special 
workings  of  the  law  of  value  which  constitute  the  real 
problem.  Certainly  he  has  not  proved  that  this  is  not 
one  of  the  cases  where  value  is  to  some  extent  depend- 
ent on  personal  judgment,  discretion  or  arbitrary  exer- 
cise of  power.  The  "  value"  of  a  transportation  service  ^ 
is  sometimes  defined  as  the  dift'erence  betv.-een  the  price 
of  the  commodity  in  question  at  the  point  of  shipment 

52  fS2 


53  ]  VALUE  OF  SERVICE  53 

and    the    price  at    the    destination,   and    so    an    external 
standard  is  quite  strongly  suggested,  yet  the  suggestion  / 
is  altogether  deceptive,  for  the  difference  in  price  itself 
depends  on  transportation  charges. 

If  the  commodity  moves  at  all  between  the  two  places, 
the  difference  in  price  tends  always  to  equal   the  cost  of 
the   most    expensive    means    of    transportation    that    is 
regularly  used  in  the  traffic.     If  a  given  rate  is  charged 
on  freight  from  Buffalo  to  Albany,  then  competition  will 
do  its  best  to  ensure  that  goods  carried  from  Buffalo  to 
Albany  shall  increase  in  value  by  just  the  amount  of  the 
rate.     Any  freight-rate  will  always  be  equal  to  the  dif-  • 
ference  betw^een  the  price  of  the  goods  at  the  origin  and 
the  price  at  the  destination.     But  this  affords  no  external 
standard  to    which    rates    may    be  conformed.     For   an 
instance  to  illustrate  what   is  meant  by  this  statement, 
let  us  suppose  that  at  "  X,"  a  western  town,  it  costs  on 
the  average  ninety  cents  a  bushel  to  raise  wheat,  and 
that   the  price  at  Chicago,  the  natural    market,   is  one 
dollar.     Obviously,  barring   direct  railway  competition, 
the  natural  value  of  transportation  of  wheat  from  "  X  " 
to  Chicago  is  ten  cents  a  bushel.     But  why  is  this  so  ? 
Why  is  wheat  worth  one  dollar  in  Chicago?     Because 
the  total  supply  demanded  at  that  price  can  be  brought 
in  from   many  supply  points  at  that  total  cost  in  each 
case.      The   price  of  one  dollar  which    is  set  on  every 
bushel  stands  for  a  certain  cost  of  raising  it  plus  a  cer- 
tain charge  for    carrying   it.     From    numberless    towns 
over   many  railways  rates  are    made  to  Chicago  which 
allow  them  to  ship  wheat,  while  from  other  towns  rates 
are  so  high  that  the  business  would  be  unprofitable ;  and 
the   price  of  one  dollar  a  bushel  at  Chicago  is,  on  the 
supply  side,  a  joint  result  of  all  these  various  rates.     This 
means  that  the  value  of  the  service  of  carrying  wheat 


54  LOCAL  FREIGHT  DISCRIMINATIONS  [54 

from  "  X  "  to  Chicago  is  fixed  by  the  joint  effect  of  the 
charges  made  for  hundreds  of  similar  services,  and  the 
same  could  with  equal  truth  be  said  of  each  of  those 
other  charges,  so  far  as  they  are  not  more  directly  fixed 
by  active  railway  competition. 

But  not  even  in  this  way  are  rates  at  all  closely  fixed. 
To  go  back  to  our  town  of  X  where  it  cost  ninety  cents 
a  bushel  to  raise  wheat,  let  us  suppose  that  the  road 
arbitrarily  raises  the  rate  to  Chicago  from  ten  cents  to 
twelve  cents.  The  cultivation  of  wheat  can  certainly  not 
go  on  under  the  old  conditions,  but,  almost  as  certainly, 
it  will  not  be  abandoned.  Two  things  will  happen.  In  J- 
the  first  place,  cultivation  will  probably  be  carried  on 
somewhat  less  intensely  at  "  X  ";  so  that  the  marginal 
cost  of  raising  wheat,  including  only  wages  and  interest 
on  capital,  will  be  somewhat  lowered.  In  the  second 
place,  the  value  and  the  rent  of  agricultural  land  at  X  ' 
will  surely  fall,  and  this  will  be  the  chief  effect  of  the  in- 
creased railway  rate.  In  the  end,  if  the  rate  of  twelve 
cents  is  kept  in  force,  the  cost  of  production  of  wheat  at 
X,  including  wages,  interest  and  re?ii  of  land,  will  be 
found  to  have  fallen  to  eighty-eight  cents  a  bushel. ' 
Similarly,  if  the  rate  were  lowered  to  eight  cents,  rents  / 
would  rise,  cultivation  would  become  somewhat  more 
intense,  and  in  the  end  a  new  equilibrium  would  be  es- 
tablished. The  conditions  of  production  adjust  them- 
selves to  any  fairly  long  continued  level  of  rates.  Thus 
the  railroad,  within  fairly  wide  limits,  has  direct  control  '' 
of  the  rent  of  land  in  places  where  there  is  no  railroad 
competition,  and  so  controls  the  "natural"  value  of 
goods    at  their   origin.     As    H.    T.    Newcomb    puts    it: 

*H.  J.  Grierson,  Railway  Rates,  English  and  Foreign,  pp.  65-6, 
mentions  that  railway  rate  advantages  are  capitalized,  in  the  long  run, 
into  land  rents,  and  that  changes  in  rates  take  effect  on  rents. 


55]  VALUE  OF  SERVICE  55 

"  Value  of  service  as  a  standard,  what  each  service  is 
worth,  the  utility  added  to  the  commodity  by  its  trans- 
portation— is  in  itself  mainly  dependent  on  the  cost  of 
transportation  between  the  localities,  and  consequently 
to  adopt  it  as  a  standard  would  be  to  travel  in  a  vicious 
and  unprofitable  circle."  ' 

Of  most  railway  services  it  may  be  said  that  their 
values  are  either  self-determined  or  else  they  fix  each 
other,  They  may  be  fixed  arbitrarily  if  the  road  is  in  the 
position  of  a  monopoly,  or  they  may  answer  the  no  less 
capricious  rule  of  a  perverted  competition.  In  neither 
case  is  there  in  the  nature  of  things  any  force  clearly 
working  to  set  up  simple  and  rational  standards  toward 
which  rates  shall  tend. 

What  the  value  phrase  really  stands  for  is  the  abandon-  1/ 
ment  of  the  "cost  of  service"  theory,  and  the  breaking  ' 
away  from  rigid  distance  tariffs.  The  dilTerence  in  form 
between  the  American  and  German  systems  is  that  the 
Americans  have  broken  away  almost  completely,  and  the 
Germans  only  in  part.  The  most  cursory  survey  of  for- 
eign rate  systems  is  enough  to  show  the  wide  range  of 
principle  and  practice  that  may  be  comprehended  under 
the  term  "  value  of  service."  We  are  concerned  now 
with  that  form  of  the  theory  which  is  used  to  justify  the 
practice  of  allowing  a  maximum  of  freedom  to  private 
roads  in  following  out  their  economic  motives. 

The  value  of  any  service  may  then  be  defined  as  that 
charge  which  will  in  the  long  run  bring  in,  over  and 
above  the  special  cost  of  the  trafific  involved,  the  greatest 
clear  return  possible  under  the  special  circumstances  of 
each  particular  case.''     French  writers  express  this  by  a 

*  Pol.  Set.  Quar.,  1896,  p.  205.   *^ 

*Gournerie,  Exploitation  des  Chemins  de  Fer.,  pp.  125-9. 


56  LOCAL  FREIGHT  DISCRIMINATIONS  [56 

beautifully  simple  diagram  showing  the  curves  of  oper- 
ating expense  and  gross  earnings  and  the  point  of  max- 
imum difference.'  Concretely,  then,  the  question  at 
issue  is :  does  "  value  of  service "  as  thus  defined  a\*d 
applied,  contain,  incidentally,  any  strong  forces  of  social  ^ 
benefit? 

In  many  businesses  it  may  truly  be  said  to  contain 
such  a  principle  :  free  competition  in  many  cases  does 
work  for  society's  good.  But  no  less  certainly  have  the 
results  of  private  self-interest  in  many  other  cases  been 
more  than  doubtful  from  a  social  point  of  view.  The 
various  prices  paid  for  oil  products  in  this  country  have 
long  been  governed  by  the  laws  of  value  working  with- 
out state  interference,  and  yet  no  one  has  used  "  value 
of  oil "  as  a  catch-word  to  justify  the  company's  prac- 
tices. It  would  never  have  pacified  consumers  who  felt 
the  price  of  oil  was  too  high,  nor  competing  producers 
who  were  ruined  by  local  and  temporary  discriminations 
to  be  told  that  oil  w^as  being  sold  at  its  economic  value. 
It  does  not  require  long  scientific  treatises  to  convince 
the  American  public  that,  while  the  interests  of  privately- 
owned  railways  may  coincide  with  those  of  society  to  a 
certain  extent,  they  are  not  identical  nor  nearly  so  in 
practice,  and  that  a  laissez-faire  policy  would  expose  the 
American  public,  consumers  of  railway  transportation, 
to  the  risk  of  serious  evils.  It  may  practically  be  taken 
for   granted  that  "  value  of  service  "  under  laissez-faire  • 

»  M.  Mange  (Ass't  Traffic  M'gr.  of  Orleans  R.  R.),  Bulletin  of  Inter- 
national Railway  Conp;ress,  '05,  p.  1969.  Rank,  Eisenbahntarifwesen, 
p.  573,  does  not  agree  with  this  statement,  but  his  conception  of  "  value 
of  service"  contains  in  itself  principles  of  common  interest  as  distinct 
from  private  interest,  and  so  is  different  from  the  American  use  of  the 
term.  See  also,  Colson,  Transports et  Tarifs,'^.\^\.  Lardner,  ^a//- 
way  Economy,  p.  249. 


57]  VALUE  OF  SERVICE  57 

Stands  for  a  policy  of  purely  private  interest  to  which 
any  public  benefits  secured  are  incidental.     In  one  sense 
this  would  seem  to  be  self-evident,  for  it  is  the  bounden 
duty  of  railway  officials  to  look  after  the  private  interests 
of    their    employers,  the    stockholders.     On    the    other 
hand,  however,  stands  a  moral  obligation,  recognized  by 
the  common  law  and  very  generally  enacted  into  statute 
form  and  more  or  less  strictly  enforced  by  commissions, 
to  the  efTect  that  rates  must  be  made  reasonable.     But 
that  the  mere  formal  requirement  of  reasonableness  is 
not  enough  to  ensure  this  result  will  be  evident  to  any- 
one who  makes  an   attempt  to  put  it  into  concrete  and 
comprehensive  form.     Let  any  man  try  to  make  out  a   / 
rule,  a  set  of  rules,  or  a  scheme  of  any  sort,  which  will 
settle  the  question  of  relative  reasonableness  in  the  ordi-   l 
nary  forms  in  which  it  is  presented,  and  he  will  have  a 
new  respect  for  the  problem.     For  its  complexities  are 
amazing  and  seemingly  insurmountable.     All  the  simple 
principles  :  cost,  distance,  etc.,  would  be  bound  to  break 
down  in  practice.     The  solutions  that  have  been  evolved 
by    foreign    state-owned    railways    have    on    the    whole 
worked  well,  but  people  are  not  yet  ready,  on  this  side 
of  the  water,  to  accept  in  full  the  principles  on  which 
they  are  built.     And  even  the  most  complete  of  formal 
schemes  used  in  the  great  states  of  continental  Europe 
fails  to  cover   anything  like  all  cases.     Through  rates, 
rates  in  competition   with  carriers  not  under  the  same 
administration,  export  rates,  special  commodity  and  de- 
velopment   rates,  are   all    made  outside    the   formula   of 
automatic  reasonableness. 

Thus  reasonableness  is  hard  to  enforce  concretely,  and 
except  so  far  as  commissions  have  made  progress  in  the 
developing  of  definite  standards,  the  common-law  provi- 
sion that  rates  shall  be  reasonable  does  not  act  with  any 


58  LOCAL  FREIGHT  DISCRIMINATIONS  [58 

compelling  force  to  check  the  railway  managers  in  fol- 
lowing any  policy  they  wish,  while  any  unjust  or  anti- 
social policy  on  their  part  is  especially  dangerous  in  that 
it  will  be  reproduced  in  multiplied  form  and  extent  on 
the  whole  face  of  the  country's  industry. 

The  unique  position  of  railways  in  their  power  over 
general  business,  and  the  consequent  economic  problem 
they  offer  has  been  perhaps  most  concisely  stated  by 
Eugen  von  Philippovich. '     He  says  : 

The  doctrine  of  free  competition  has  been  much  afifected  by 
the  recent  developments  of  transportation,  especially  by  the 
railroads.  Not  alone  because  they  showed  in  their  own  case 
that  free  competition  can  lead  to  monopoly,  but  chiefly  since 
through  their  iiifluence  competition  of  private  industrial  under- 
takings has  lost  its  reg:ulative  force.  The  advantage  of  low 
freight  rates  proved  more  influential  than  the  industry  and 
natural  advantages  of  local  producers  ....  But  where  the 
influence  of  such  factors,  which  are  independent  of  the  single 
competitors,  has  become  so  significant,  the  law  of  free  compe- 
tition no  longer  holds.  Science  has  now  not  merely  to  study 
the  workings  of  free  competion,  but  especially  to  investigate 
how  the  conditio7is  of  the  competitors  can  be  made  once  more  in 
large  vieasure  equal.  These  facts  have  contributed  most  largely 
to  the  result  that  today  the  doctrine  of  free  competition  is 
increasingly  complicated  and  less  confined  to  the  simple  for- 
mulae of  the  past.  Out  of  its  very  workings,  indeed,  the  prin- 
ciple of  state  intervention  has  of  itself  developed. 

In  this  place  it  will  be  in  order  to  take  up  some  of  the 
arguments  of  those  who  hold  that  purely  private  rate- 
making  works  for  the  common  good.  If  such  a  study 
does  nothing  else  it  will  at  least  show  what  kind  of  rates, 

•Translated  from  the  Archiv  fur  Eisenbahnwesen.    The  translation 
and  italics  are  my  own. 


59]  VALUE  OF  SERVICE  59 

in  the  opinion  of  these  critics,  the  common  good  de- 
mands. 

It  has  been  asserted  by  some  writers  that  the  private 
theory  of  rates  is  identical  with  that  which  would  be 
evolved  by  the  most  enlightened  public  servants.  Mr. 
M.  M.  Kirkman  '  makes  this  assertion  in  the  following 
terms : 

The  interests  of  a  community  and  the  carriers  who  supply  it 
are  one,  and  while  they  will  have  many  differences,  they  must 
mutually  support  and  protect  each  other.  Left  to  their  own 
devices,  carriers  will,  so  far  as  they  can,  adjust  rates  so  that 
every  interest  shall  receive  some  advantage.  This  is  the  limit 
of  their  power.  Interests  that  cannot  conform  to  this  just 
requirement,  without  trenching-  on  the  just  profits  of  others, 
are  abnormal,  artificial,  hurtful  to  a  community.  Business 
that  cannot  be  handled  under  such  circumstances  should  be 
allowed  to  die  out. 

This  statement  is  framed  in  the  terms  of  economic 
argument,  but  it  is  hardly  more  than  a  sweeping  general 
assertion.  More  is  claimed  by  implication  than  would 
stand  under  a  thorough  analysis  of  the  rather  loose 
wording  of  the  section.  Certainly  business  that  cannot 
survive  under  a  just  tariff  is  abnormal ;  but  what  stand- 
ard of  justice  is  established  ?  A  mere  assertion  that  the 
roads  will,  "so  far  as  they  can"  give  "every  interest 
some  advantage  "  will  hardly  satisfy  a  mind  skeptical  as 
to  the  infinite  wisdoin  and  benevolence  of  the  traffic  men 
who  wield  the  rate-making  power. 

The  attitude  of  Mr.  H.T.  Newcomb  is  more  significant. 
In  arguing  for  the  desirability  of  using  existing  railway 
plants  to  the  fullest  possible  capacity,  he  says  :^ 

'Kirkman,  Science  of  Railways,  vol.  viii,  pp.  72  et  seq. 
'  Newcomb,  Railway  Economics,  p.  87. 


6o  LOCAL  FREIGHT  DISCRIMINATIONS  [60 

Society  should  not  be  compelled  to  continue  the  production 
of  form  utilities  with  difficulty  and  under  unfavorable  local 
circumstances  when  the  same  articles  mig-ht  be  made  available 
to  consumers  in  the  same  locality  with  a  lower  expenditure  of 
energy  by  diverting-  a  part  of  that  employed  in  producing- 
form  utilities  to  the  production  of  place  utilities.  Society  is 
forced  to  accept  this  unnecessary  sacrifice  whenever  a  railroad 
refuses  or  is  compelled  to  refuse  any  increment  of  traffic,  be- 
cause it  cannot  be  made  to  contribute  what  is  considered  its 
just  proportion  of  the  fixed  charg-es.  Sufficient  revenue  should 
be  secured  from  each  particular  item  of  traffic,  ...  as,  with- 
out preventing-  the  movement  of  any  traffic  from  which  this 
minimum  of  revenue  (special  cost)  can  be  continuously  main- 
tained, will  in  the  long-  run  secure  in  addition  from  each  item 
the  larg-est  practicable  contribution  toward  reasonable  remu- 
neration of  the  expenditures  of  energy  which  are  incurred  for 
joint  account. 

This  I  take  to  be  a  representative  statement  of  the  belief 
of  those  who  would  leave  our  system  alone,  and  if  it 
were  literally  true  it  would  be  convincing.  But  the  last 
sentence  seems  to  the  writer  to  contain  two  mutually 
exclusive  conditions ;  for  it  is  impossible  to  cover  fixed 
charges  without  preventing  the  movement  of  some  traffic 
which  could  pay  the  minimum  charge.  To  illustrate  this 
point,  let  us  suppose  the  rates  on  woolen  cloth  from  X, 
the  site  of  a  mill,  to  surrounding  stations  are  such  as  to 
give  the  road  a  net  revenue.  Let  the  rate  now  be  low- 
ered to  the  minimum  level  and  at  once,  other  things 
being  equal,  the  output  of  the  mill  is  increased;  that  is, 
new  traffic  moves.  If  all  rates  were  placed  at  the  mini- 
mum level,  traffic  would  be  enormously  increased,  and 
once  this  were  done  it  would  be  a  very  exceptional  rate 
which  could  be  raised  again  without  preventing  the 
movement  of  some  traffic.     Mr.  Newcomb's  claim,  to  be 


6i]  VALUE  OF  SERVICE  6l 

valid,  should  read,  "  Without  preventing  the  movement 
of  any  more  traffic  than  is  necessary  in  the  raising  of  the 
fixed  charges."  So  much  as  to  the  tendency  of  a  laissez- 
faire  system  he  can  assert  without  being  disputed.  But 
if  in  order  to  pay  fixed  charges,  the  "largest  practica- 
ble "  contribution  over  and  above  operating  expenses  is 
secured  from  each  item  separately,  then  what  assurance 
does  Mr.  Newcomb  present  that  the  sum  total  will  be 
only  a  "  reasonable  remuneration  "  and  not  very  much 
more  ?  Or  if  the  total  remuneration  were  found  to  be 
unreasonably  high,  what  remedy  would  a  laissez-faire 
system  have  to  offer? 

Mr.  Newcomb  does  not  claim  perfection  under  laissez- 
faire.  While  believing  that  free  competition  is  a  guar- 
antee of  progress  and  the  adjustment  of  rates  to  condi- 
tions, ^  he  also  lays  down  principles  of  reasonableness 
which  the  actual  practice  of  the  roads  has  continually 
violated.     He  says  :  "" 

It  appears  to  be  sociall}^  desirable  that  energy  expended  in 
the  business  of  transportation  shall  receive  the  same  remu- 
neration as  a  similar  amount  of  energfy  expended  in  other 
lines  of  production,  and  that  rates  for  different  transportation 
services  shall  vary  in  accordance  with  the  different  amounts 
of  energ^y  required  to  perform  them,  in  order  that  society  shall 
have  neither  too  much  nor  too  little  transportation.  It  is 
believed  that  in  some  sections  there  has  been  much  transpor- 
tation that  was  socially  undesirable  because  it  actually  en- 
hanced the  real  cost  of  production. 

One  could  wish  this  statement  were  made  more  ex- 
plicit. It  might  seem,  and  is  impliedly  claimed  by  many 
railroad  men,  that  no  rate  at  which  traffic  could   move 

^  Afoody's  Magazine,  January,  1906. 
'Newcomb,  op.  cit.,  pp.  66-69. 


62  LOCAL  FREIGHT  DISCRIMINATIONS  [62 

with  a  margin  of  profit   both    to  road  and    to  shippers 
could  "enhance  the  real  cost  of  production." 

Probably  Mr.  Newcomb  had  in  mind  some  of  the  prac- 
tices mentioned  in  an  article  by  Prof.  W.  Z.  Ripley.  ' 
Among  these  may  be  mentioned  the  successful  competi- 
tion of  roundabout  routes  which  take  traffic  which  might 
go  by  more  direct  ones.  These  indirect  routes  may 
belong  to  one  road  or  to  several  :  in  the  latter  case  each 
line  is  interested  in  getting  its  pro-rata  share  of  the  total 
through  rate.  Thus  traffic  may  travel  around  two  sides 
of  a  triangle  or  three  sides  of  a  square,  or  may  zigzag 
on  an  easterly  route  because  diverted  by  the  competition 
of  some  north  and  south  cross  lines  working  in  connec- 
tion with  a  rival  east  and  west  route.  The  roundabout 
route  is  especially  likely  to  get  the  traffic  if  it  is  owned 
by  one  road  which  also  owns  part,  but  not  all,  of  the 
direct  route.  Such  a  road  would  rather  get  the  whole 
rate  for  the  longer  haul  than  part  of  the  rate  for  the 
shorter  one,  and  may  get  the  desired  result  by  making 
its  proportional  of  the  joint  rate  prohibitive.  A  similar 
policy  may  be  followed  when  there  is  a  choice  between 
a  shorter  through  route  in  which  the  share  of  the  road  in 
question  is  small,  and  a  longer  route  in  which  its  share 
is  larger.  Some  apparent  wastes  of  this  kind  are  due  to 
entirely  legitimate  causes,  such  as  congestion  of  the 
direct  line,  or  "  back-loading  "  on  the  roundabout  route 
of  cars  that  would  otherwise  move  empty.  But  there  is 
undoubtedly  much  real  waste,  which  could  be  avoided 
by  the  Austrian  policy  of  efficient  money  pools  under 
which  rates  are  so  adjusted  that  the  traffic  is  largely 
directed  over  the  line  found  to  be  cheapest,  ' 

^  Pol.  Set.  Quar.,  vol.  xxi,  pp.  381  et  seq.  See,  also,  Savannah 
Naval  Stores  Case,  8  Int.  Com.  Rep.,  376;  and  Colorado  Fuel  and  Iron 
Co.  V.  So.  Pac.  Co.,  6  Int.  Com.  Rep.,  488. 

*Rank,  Eisenbahntariftechnik,  p.  68. 


63]  VALUE  OF  SERVICE  63 

In  other  cases  the  same  kind  of  goods  travel  over  the 
same  route  at  the  same  time  in  opposite  directions. 
This  may  occur  as  a  phase  of  competition  for  propor- 
tionals of  through  rates  ;  but  also  as  a  result  of  a  sort 
of  mutual  "  competition  of  markets  "  in  which  the  pro- 
ducers in  each  place  keep  costly  and  uneconomical  "out- 
posts of  competition  "  in  the  other  man's  territory, 
either  for  moral  effect  or  in  the  hope  that  the  business 
will  expand  until  it  justifies  itself. 

But  aside  from  these  evident  and  direct  wastes  men- 
tioned by  Ripley,  may  there  not  be  others?  Is  there 
not  an  enhancing  of  the  real  cost  of  production  when- 
ever a  producer  is  favored  by  rates  barely  above  cost  of 
handling,  although  there  are  others  who  would  have  the 
business  if  they  were  not  prevented  by  relatively  higher 
rates,  rates  high  enough  to  give  the  road  a  considerable 
profit  of  operation?  Such  rates  do  cause  socially  un- 
profitable carriage  of  goods,  and  they  are  the  inevitable 
result  of  the  very  competition  which  Mr.  Newcomb 
believes  in.  Every  time  any  place  is  specially  and 
markedly  favored  in  the  matter  of  railway  rates,  for 
whatever  reason,  the  way  is  laid  open  for  just  such  un- 
economical transportation  as  Mr.  Newcomb  comdemns. 
Thus,  on  his  own  showing,  we  have  the  following  alter- 
native. We  may  try  to  secure  adaptability  and  progres- 
siveness  by  continuing  to  stimulate  competition,  in  which 
case  we  must  accept  the  uneconomical  discriminations 
which  are  bound  to  result.  Or,  on  the  other  hand,  we 
may  encourage  pooling  and  consolidation,  in  which  case 
we  must  trust  to  the  wisdom  of  the  traf^c  managers  to 
make  rates  relatively  reasonable  on  the  principle  Mr. 
Newcomb  suggests,  and  to  their  altruism  to  make  the 
absolute  level  of  rates  reasonable. 


64  LOCAL  FREIGHT  DISCRIMINATIONS  [64 

Mr.  Acworth  has  stated  the  case  in  a  somewhat  differ- 
ent way.     He  says : 

The  real  meaning-  of  the  phrase  (charg-ing  what  the  traffic  will 
bear)  is  that  within  the  superior  limit  of  what  any  particular 
traffic  can  alTord  to  pay  and  the  inferior  limit  of  what  the 
railroad  can  afford  to  carry  it  for,  railway  charg-es  for  differ- 
ent categ:ories  of  traffic  are  fixed,  roughly  on  the  principle  of 
equality  of  sacrifice  by  the  payer.  So  regarded,  what  the 
traffic  will  bear  is  a  principle,  not  of  extortion,  but  of  equit- 
able concession  to  the  weaker  members  of  the  community. 

We  may  consider  this,  not  as  a  complete  or  fair  state- 
ment of  Mr.  Acworth's  whole  position,  but  as  represent- 
ing the  position  of  one  who  would  give  the  freest  play 
to  the  roads  under  the  "value  of  service"  theory.  As 
such  it  may  be  criticised  on  several  grounds. 

In  the  first  place,  rates  made  by  the  roads  are  not 
fixed  071  the  principle  of  "  equality  of  sacrifice  "  or 
"equitable  concession"  primarily.  The  principle  which 
governs  the  rate-makers,  the  motive  of  their  actions,  is 
that  of  causing  their  road  to  earn  as  much  net  income  as 
is  possible  considering  all  the  circumstances  under  which 
it  works.  Equality  of  sacrifice  to  the  rate  payers  and 
equitable  concessions  to  the  weaker  ones  may  follow, 
but  are  incidental.  The  law  of  miaximum  return  may 
sanction  practices  not  covered  by  these  beneficent  rules. 
To  use  the  analogy  of  taxation,  there  might  be  between 
railroad  self-interest  and  truly  "  equitable  concession " 
as  wide  a  difference  as  that  between  ancient  systemis  of 
taxation-aiming  only  at  the  largest  obtainable  revenue, 
and  a  modern  system  intelligently  based  on  the  tax- 
bearers'  ability  to  pay,  Mr.  Acworth,  however,  seems  to 
claim  that  enlightened  self-interest  will  tend  to  follow 
the  latter  principle.     Before  settling  whether  the  value 


65]  VALUE  OF  SERVICE  65 

principle  is  in  reality  identical  with  Acworth's  proposi- 
tions, the  wording  of  them  will  demand  some  study. 

In  the  first  place,  who  are  the  payers  of  rates,  and  in 
what  sense  are  their  sacrifices  equalized?  In  what  sense 
can  we  speak  of  their  sacrifices  at  all  ?  If  a  transporta- 
tion service  involved  a  true  sacrifice  it  would  never  be 
made.  The  burdens  must  be  negative,  and  consist  in 
receiving  less  benefit  than  does  some  one  else.  Who 
then  bears  the  burdens  or  receives  the  benefits?  It 
would  be  interesting  to  learn  whether  Mr.  Acworth  re- 
ferred to  producers,  as  the  context  would  seem  to  imply, 
or  whether  he  was  thinking  of  the  ultimate  beneficiaries, 
the  consumers.  There  are  several  rather  distinct  things 
which  the  expression  might  mean,  and  it  seems  likely 
that  a  combination  of  them  was  in  the  author's  mind. 
If  he  had  in  mind  individual  producers  whose  situation, 
efficiency,  etc.,  may  vary,  then  the  meaning  would  be 
that  the  roads  should  endeavor  to  keep  profits  about 
equally  distributed  among  all  producers  in  any  one  line. 
It  can  be  easily  shown  that  this  would  follow,  or  at  least 
that  it  would  be  the  best  of  the  interpretations  that  could 
be  made  to  follow  from  the  principle  stated.  The  burden 
or  sacrifice  of  transportation  in  the  case  of  any  producer 
lies  essentially  in  the  limitation  of  the  market  in  which 
he  is  enabled  by  the  charges  to  do  a  profitable  business 
against  the  competition  of  rivals.  A  big  industry  is  so 
only  because  transportation  rates  are  such  that  it  can 
market  its  product  at  a  distance.  A  small  and  profitable 
industry  will  inevitable  expand  its  output  and  the  size 
of  its  market  until  the  burdens  of  transportation  neu- 
tralize the  advantages,  and  any  further  expansion  would 
involve  a  true  sacrifice.  The  roads  in  establishing  any 
kind  of  "equality"  among  such  producers  must  act  more 
or  less  arbitrarily.     All  they  can  do,  if  they  avoid  favor- 


66  LOCAL  FREIGHT  DISCRIMINATIONS  [66 

itism,  is  to  grant  existing  producers  such  rates  as  will 
give  them  all  roughly  the  same  rate  of  profit,  always,  of 
course,  keeping  within  the  natural  economic  limit  of 
charges. 

This  will  involve  "concession  to  the  weaker,"  but 
will  such  concessions  to  the  weaker  be  necessarily 
*'  equitable  "  ?  Will  it  not,  on  the  other  hand,  amount 
to  throwing  away  entirely  one  of  the  great  benefits  of 
industrial  competition,  that  is,  the  struggle  for  existence 
with  the  growth  and  expansion  of  the  fit  and  the  stagna- 
tion or  elimination  of  the  less  fit  or  unfit?  Will  it  not 
be  like  giving  handicaps  in  a  championship  race  which 
should  be  run  "from  scratch"?  If  the  weak  are  helped, 
who  knows  if  the  best  man  wins  ?  A  producer  may  be 
weak  because  he  has  inferior  natural  advantages  or  an 
inferior  organization  in  his  business.  Is  it  equitable  that 
he  should  continue  to  supply  a  market  when  a  more 
efficient  producer  somewhere  else  is  prevented  from 
doing  so  only  by  a  heavier  burden  of  transportation 
charges?  If  the  policy  of  concession  merely  retards  the 
natural  process  of  the  extinction  of  such  weaker  mem- 
bers, allowing  them  to  retire  without  disastrous  loss,  in 
so  far  it  may  be  beneficial.  But  if  it  goes  further,  goes 
so  far  as  to  perpetuate  the  inefficient  producer,  in  so  far 
it  must  check  economic  progress.  And  there  is  nothing 
in  the  principle  of  value  of  service  or  maximum  net 
return,  as  it  is  ordinarily  applied  in  railway  offices,  to 
settle  this  problem  in  any  but  the  most  accidental  and 
haphazard  way.  To  summarize,  then  : — if  "  equitable  con-, 
cession  "  applies  to  single  producers,  there  is  no  assur- 
ance against  the  perpetuation  of  the  economically  unfit 
and  the  weakening  of  the  forces  of  economic  progress. 

On  the  other  hand,  however,  the  phrase  may  refer  to 
producers   of   certain    kinds    of    goods.      The    "  weaker 


67J  VALUE  OF  SERVICE  67 

members  "  who  are  to  receive  concessions  may  be  those 
who  are  weaker  because  their  business  is  incapable  of 
great  expansion  under  the  burden  of  ordinary  rates. 
Here  we  have  length  of  shipments  limited,  not  by  the 
competition  of  localized  producers,  but  rather,  to  render 
a  German  expression,  by  the  exhaustion  of  the  intrinsic 
capacity  of  the  goods  to  bear  transportation  charges. ' 
In  such  a  case  traffic  will  fail  to  move  not  because  the 
consumers  can  get  the  same  commodities  in  some  other 
cheaper  way,  but  because  they  would  rather  go  without, 
or  use  some  substitute  commodity. 

This  carries  the  idea  of  equality  of  sacrifice  over  from 
the  producer  to  the  consumer.  If  the  market  for  a  given 
line  of  goods  cannot  expand  as  a  whole,  it  is  because 
the  burden  on  the  consumer  is  too  great.  Coal  as  an 
article  of  direct  consumption  is  an  example  of  a  good 
satisfying  a  primary  want  and  so  important  to  many,  while 
as  a  marginal  good  it  appeals  to  those  great  masses  who 
are  quite  low  in  the  economic  scale.  Hence  a  sufficient 
reduction  in  price  will  cause  the  movement  of  large 
quantities,  benefiting  the  roads  and  at  the  same  time  the 
people,  especially  the  poor.  This  is  merely  the  principle 
of  classification,  in  which  it  cannot  be  disputed  that  the 
interests  of  the  roads  and  of  society  are  in  general  most 
harmonious. 

But  it  can  be  easily  seen  that  in  any  widely  applied 
classification  system  we  have  the  roads  valuing  their 
traffic,  not  item  by  item  but  in  totals  and  averages. 
The  probable  volume  and  desirability  to  the  road  of  the 
whole  traffic  in  any  one  article  must  be  estimated  in  giv- 
ing that  article  its  place  in  the  classification.     In  so  far 

^Rank,  Eisenbahntarifwesen,  passim.     Launhardt  and  others   also 
make  this  distinction. 


68  LOCAL  FREIGHT  DISCRIMINATIONS  [68 

classification  is  the  kind  of  policy  a  foreign  public  road 
would  adopt.  Strictly,  it  is  not  always  to  the  interest 
of  a  road  to  follow  a  uniform  classification  system.  If 
there  were  no  uniform  classification,  and  if  every  traffic 
manager  made  rates  as  he  thought  best  for  the  road,  the 
results  would  be  in  a  general  way  like  the  existing  sys- 
tem, but  there  would  be  no  uniformity,  no  semblance  of 
order.  Further,  direct  competition,  tending  as  it  does 
to  hammer  rates  down  to  the  special-cost  level,  combats 
the  classification  principle,  as  happened,  for  example,  in 
those  rate  wars  which  temporarily  annihilated  classifica- 
tions in  the  trunk-line  section.  However,  under  com- 
parative laissez-faire  the  roads  have  in  fact  progressed 
steadily  toward  a  practicable  uniform  classification  in  the 
face  of  the  most  tremendous  difficulties.  In  so  far,  they 
have  used  their  private  taxing  power  on  the  faculty  prin- 
ciple, as  the  most  enlightened  state  might  have  done. 
So  that  Mr.  Acworth's  claim,  that  the  roads  tend  to  fol- 
.,  low  a  policy  of  equitable  concession  to  the  weaker,  seems 
thoroughly  justified  as  far  as  it  regards  freight  classifica- 
tion. Further  than  this,  however,  it  would  seem  that 
the  writers  quoted  have  scarcely  made  out  a  convincing 
case.  A  skeptical  mind  would  hardly  be  persuaded  that 
the  roads  could  be  wholly  trusted  to  carry  out  a  satis- 
factory social  policy.  The  fact  is  recognized  in  the  vari- 
ous discussions,  that  there  are  such  social  standards,  but 
as  to  their  identity  with  the  workings  of  railway  self- 
interest  there  is  still  room  for  doubt. 

The  standard  of  reasonableness,  so  far  as  it  has  been 
unearthed,  is  the  expression  of  the  right  of  any  market 
to  the  services  of  those  producers  who  will  satisfy  its 
wants  at  the  lowest  social  expense.  That  is,  rates  should 
be  such  as  to  give  the  competitive  markets  to  the  most 
efficient  producers,  including  in  the  calculation  of  effi- 


69]  VALUE  OF  SERVICE  69 

ciency  the  actual   cost   of  any   transportation   involved. 
This  we  may  call  the  comparative  cost  standard  of  reason- I 
ableness.     Another  has  also  been  suggested,  which  we  1 
may   call   the   established  interests  standard,  and  which ' 
requires   in   its   mildest   form    that   producers'   markets 
shall  not  be  so  limited  as  to  destroy  the  value  of  actual 
invested  capital,  if  such  a  result  can  possibly  be  avoided. 
Sometimes  the  vested-interest  idea  is  extended  to  cover 
the  expectation  of  an  averate  rate  of  growth.     The  latter 
standard  is  comparatively  easy  to  apply,  while  the  former 
or  comparative  cost  standard  is  dif^Qcult  if  not  impossible. 


CHAPTER  IV 

PRIVATE    AND    PUBLIC   INTERESTS,  AS  TO  RELATIVE    RATES 

Let  us  now  study  somewhat  more  in  detail  the  value 
of  service  policy.  The  common  statement  of  it  can  be 
quite  briefly  summarized.  The  value  of  any  given  trans- 
portation service  is  not  rigidly  fixed.  Customers'  esti- 
mates of  it  vary,  just  as  their  estimates  of  the  utility  of 
anything.'  A  road,  then,  tends  to  charge  in  each  case 
the  rate  that  will  bring  in  the  greatest  possible  addition 
to  its  net  earnings,  that  is,  the  greatest  possible  return 
above  all  costs  that  are  special  to  the  traffic  involved. 
The  fixed  charges  and  all  truly  "general"  expenses, 
then,  do  not  figure  in  the  making  of  isolated  rates. =" 
The  point  of  maximum  net  return  may  be  a  true  mo- 
nopoly price  in  the  case  of  local  traffic,  and  be  governed 
by  the  usual  tendencies  and  limitations  of  monopolies. 

In  this  situation,  as  indeed  in  general,  a  higher  rate 
will  tend  to  be  charged  on  things  of  high  specific  value 
than  on  things  whose  value  per  bulk  is  low.  This  is  one 
of  the  principles  of  classification.  Another  general  prin- 
ciple is  that,  aside  from  the  effects  of  competition,  long 
distance  traffic,  like  low  grade  traffic,  must  be  given  a 
rate  much  nearer  the  special-cost  level  than  that  which 
will  pay  on  short  distance  traffic.  One  other  appreciable 
force  is  that  of  public  opinion,  which  works  in  a  general 

'Colson,  Transports  et  Tarifs,  p.  191. 
"^ Ibid.,  p.  174. 

70  [70 


71  ]  PRIVATE  AND  PUBLIC  INTERESTS  yi 

way  for  a  tariff  based  on  distance.  But  where  two  roads 
compete  directly  for  the  same  traffic,  it  will  pay  either  to 
take  it  from  the  other  by  cutting  rates,  down  to  the  level 
of  the  special  cost  of  the  traffic  involved.'  In  such  cases 
rates  may  go  temporarily  below  that  level  without  any 
definite  minimum  limit. 

However,  in  such  "through"  traffic  the  ultimate  com- 
petitive rate  is  never  reached  except  in  short  wars,  end- 
ing in  agreements  or  understandings.  "Competitive" 
rates,  then,  are  fixed  somewhere  between  the  level  of 
special  cost  on  the  one  hand  and  the  higher  quasi- 
monopoly  level  of  the  local  rates  on  the  other;  and 
between  these  limits  the  level  of  rates  is  determined  by 
the  binding  force  of  purely  extra-legal  agreements  and 
the  efficiency  with  which  these  can  be  enforced.  It  may 
be  added  that  the  stronger  the  roads  are  financially,  the 
easier  of  enforcement  are  the  agreements ;  and  that  it  is 
highly  probable  that  the  most  important  voice  in  the 
making  of  an  agreement  would  be  that  of  the  road  which 
would  be  most  formidable  in  case  of  war,  namely,  the 
financially  weak  road. 

Moreover,  even  when  roads  are  actively  competing 
and  thus  favoring  shippers  at  the  junction-points  above 
their  rivals  at  local  points,  a  policy  of  purely  private 
interest  will  not  even  guarantee  equal  treatment  as  be- 
tween the  former.  For  roads  have  found  it  wasteful  to 
make  a  low  published  rate  and  charge  it  to  all  alike ; 
moreover,  such  a  policy  made  concealment  impossible, 
and  all  competing  lines  would  know  just  what  they  had 
to  meet,  and  act  accordingly.  For  these  reasons  it  was 
often  better  tactics  to  "  give  one  hustler  a  special  rate, 
and  let  him  scoop  the  business."     The  reasonableness  of 

'  Colson,  Transports  et  Tarifs,  p.  173. 


72  LOCAL  FREIGHT  DISCRIMINATIONS  [72 

this  needs  no  discussion.  As  to  the  prevalence  of  it,  less 
than  a  decade  ago:  "Such  discriminations  in  the  case  of 
grain  ,  .  .  had  gone  so  far  that  each  railroad  reaching 
into  the  grain  district  had  eliminated  all  competitive 
dealing" — among  the  middlemen  who  operated  in  the 
grain  which  it  carried.^ 

Thus  it  comes  about  that  direct  competition  of  rail- 
ways acts,  or  at  least  seems  to  act,  with  varying  degrees 
of  intensity  and  thus  to  fix  rates  at  different  levels  in 
different  cases.  This  appears  inconsistent  with  the  es- 
sential nature  of  competition,  but  common  observation 
testifies  that  it  is  a  fact."*  The  explanation  must  lie  in 
the  further  fact  that  the  rates  are  not  truly  competitive, 
but  are  the  semi-monopolistic  truces  of  an  anomalous 
competition.  These  truces  are  harder  to  maintain  where 
there  are  many  competitors  or  where  some  are  finan- 
cially embarrassed. 3 

Thus  we  have  two  main  types  of  situation  under  which 
rates  are  made,  not  so  far  distant  from  each  other  as 
complete  monopoly  and  "free"  competition,  but  still 
decidedly  different  in  their  nature,  and  affording  the 
commonest  cause  of  local  discrimination.  For  while 
the  competition  for  through  traffic  is  decidedly  im- 
perfect, so  also  is  the  road's  monopoly  power  over 
the  local  traffic  incomplete,  since  it  is  limited  by  the 
forces  we  have  treated  under  the  name  of  "  competition 

>U.  S.  V.  Mich.  Cent.  R.  R.,  122  Fed.  Rep.,  544  (1903). 

'  E.  R.  Johnson,  in  lectures  at  Wisconsin  University  in  July  of  igop, 
stated  that  competitive  forces  were  more  powerful  at  New  York  than  at 
Philadelphia.  See,  also,  Hilton  Lumber  Co.  v.  Wilmington  &  West- 
ern R.  R.,  9  I.  C.  C.  Rep.,  17;  and  21st  annual  Report  of  Interstate 
Commerce  Commission,  p.  161. 

'R.  R.  Commission  of  Kty.  v.  L.  &  N.  R.  R.  Co.,  13  I.  C.  C.  Rep., 
300.     McLaughlin  Bros.  v.  Adams  Express  Co.,  12  I.  C.  C.  Rep.,  489. 


73]  PRIVATE  AND  PUBLIC  INTERESTS  73 

of  markets."  By  this  is  meant,  as  will  be  recalled,  the 
force  which  compels  the  road,  under  penalty  of  losing 
traffic,  to  give  such  local  rates  that  the  producers  on  its 
line  can  ship  to  common  markets  in  competition  with 
producers  on  other  lines. 

By  some  the  "competition  of  markets,"  or  better,  per- 
haps, the  sectional  competition  of  producers,  is  regarded 
as  a  sufficient  force  to  ensure  a  reasonably  low  general 
level  of  rates.  The  idea  is  of  comparatively  recent 
growth  though  it  is  new  not  so  much  in  its  nature  as  in 
the  application  of  it  and  the  emphasis  laid  on  it.  Presi- 
dent Hadley's  book  contains  some  treatment  of  it,  but 
the  author  did  not  think  it  important  enough  to  modify 
the  general  proposition  that  railway  competition  properly 
so-called  is  limited  to  the  direct  form  and  localized  at 
junction  points.'  More  recently,  however,  there  has  been 
a  significant  change  of  emphasis,  which  may  be  found  to 
be  important  enough  to  modify  very  radically  the  con- 
clusions of  the  earlier  writers.  For  this  view  not  only 
tends  to  minimize  the  difference  in  situation  between  the 
local  and  the  so-called  competitive  point,  but  it  does 
more.  It  appears  to  provide  as  a  substitute  for  the  dis- 
astrous direct  form  of  competition  a  new  form  which 
shall  be  more  uniform  and  less  extreme  in  its  effects, 
thus  avoiding  the  two  great  objections  to  railway  com- 
petition as  Hadley  has  stated  them.  This  change  in 
attitude  corresponds  to  a  change  in  the  character  of 
rates.  The  distinction  between  the  local  and  the  competi- 
tive rates  is  being  minimized  in  practice  by  a  growing 
tendency  toward  uniformity.  Possibly  we  are  beginning 
to  gain  by  experience  the  far-seeing  attitude  which 
Hadley   himself   predicted,    while    deploring    the    short- 

*  Hadley,  Railroad  Transportation,  p.  114. 


74  LOCAL  FREIGHT  DISCRIMINATIONS  [74 

sightedness  which  prevailed  at  the  time  he  wrote.  He 
said:'  "We  have  not  learned  to  look  ten  or  twenty 
years  ahead.  The  managers  of  our  largest  enterprises 
still  invite  competition  by  high  rates  instead  of  forestal- 
ling it  by  low  ones,  and  still  handicap  their  best  cus- 
tomers by  discriminations  instead  of  developing  their 
trade  by  equality  of  charges."  But  though  the  problem 
of  discriminations  may  have  been  helped  somewhat  by 
an  increasing  recognition  by  the  roads  of  their  long-run 
interests  yet  the  problem  is  certainly  not  solved ;  it  is 
still  with  us. 

These  discriminations  form,  as  all  are  aware,  probably 
the  knottiest  part  of  the  railway  problem.  The  various 
bodies  of  men  who  have  studied  the  problem  have  been 
hard  put  to  it  to  draw  the  dead-line  between  good  prac- 
tices and  bad  ones,  and  would  have  given  much  for  any 
simple  principle  or  principles,  according  to  which  they 
could  be  classified.  Dropping  for  the  moment  the  dififi- 
cult  "comparative  cost  "  standard,  there  is  a  much  sim- 
pler way  in  which  at  least  one  kind  can  be  distinguished 
from  the  rest ;  namely,  those  which  result  from  direct 
competition  of  carriers  at  junctions. 

Such  discriminations  are  due  to  the  same  motive  as 
all  others ;  to  increase  net  earnings.  Every  low  rate  is 
made  to  enlarge  the  traffic  of  the  road  that  makes  it ; 
but  this  can  be  done  in  either  of  two  very  different  ways. 
The  first  way  is  to  induce  shipments  that  would  not 
otherwise  have  been  made  at  all : — "  to  develop  new  busi- 
ness." Now  on  account  of  the  division  of  railway  costs 
into  fixed  and  variable  charges,  any  discriminating  rate 
that  really  creates  new  business — that  increases  the 
volume  of  traffic  handled  by  the  existing  railway  plants 

*  Hadley,  Economics,  p.  175. 


75]  PRIVATE  AND  PUBLIC  INTERESTS  75 

of  the  country — any  such  rate  increases  the  efficiency  of 
the  roads  as  producers  of  wealth.  Such  rates  are  good 
economic  policy,  with  one  limitation.  In  increasing 
their  own  efficiency  as  producers,  railroads  must  not  in- 
jure the  efficiency  of  the  other  producers  serving  society ; 
that  is,  they  must  not  interfere  with  the  proper  workings 
of  the  competitive  system,  on  which  we  believe  the  pro- 
ductive efficiency  of  our  society  is  based.  They  must 
not,  in  helping  one  shipper,  injure  or  drive  out  of  busi- 
ness some  other  in  another  place  who  has  an  equal  or 
better  right  to  survive  by  virtue  of  his  productive  effi- 
ciency. This  leads  logically  to  the  "comparative  cost" 
standard  of  reasonableness,  already  mentioned. 

The  second  way  of  increasing  a  road's  business  is  to 
take  it  from  some  other  carrier;  say  some  other  railroad. 
Doing  this  does  not  appreciably  increase  the  business  or 
efficiency  of  the  roads  as  a  whole,  and  if  it  injures  other 
industries  as  a  whole  by  vitiating  the  true  operation  of 
the  law  of  competition,  then  it  should  be  condemned  as 
anti-social.  Where  a  discrimination,  results  from  the 
action  of  two  carriers,  both  bidding  below  the  average 
cost  of  their  services,  not  to  stimulate  new  business  but 
for  the  mere  purpose  of  getting  existing  traffic  away 
from  each  other,  there  the  good  effects  of  discriminations 
are  wholly  absent  and  only  the  bad  remain. 

But  how  about  the  practices  of  roads  under  conditions 
of  monopoly  or  of  competition  of  the  indirect  kind  ? 
Leaving  out  of  account  for  the  moment  the  general  level 
of  charges,  already  discussed,  is  there  any  natural  ten- 
dency here  to  adjust  rates  relatively  to  each  other  on 
something  like  the  "comparative  cost"  principle?  The 
railway  officials  themselves,  rather  than  any  outside  body, 
are  best  equipped  with  the  information  necessary  to  fol- 
low  such  a  policy  out,  provided  they  have  the  motive. 


76  LOCAL  FREIGHT  DISCRIMINATIONS  [76 

If  this  question  be  approached  in  an  a-priori  way,  such 
a  motive  can  be  deduced,  while  an  inductive  study  de- 
velops facts  that  give  the  He  to  the  results  of  such  a  de- 
duction. 

In  this  bit  of  a-priori  reasoning,  we  must  exclude 
I  competition  between  lines  having  common  termini,  as 
I  this  of  course  violates  the  comparative-cost  rule  at  every 
point.  But  if  we  consider  the  road  as  a  monopoly,  then 
it  could  in  the  long  run,  get  the  largest  margin  of  mon- 
opoly profit  out  of  the  producers  who  (including  trans- 
portation expenses)  are  most  efficient.  Thus  it  would 
be  false  policy  to  burden  those  producers  so  heavily  as 
to  put  them  at  a  disadvantage  as  compared  with  less 
efficient  ones.  Similarly  if  we  take  the  hypothesis  of 
"  market  competition "  by  which  the  road  is  forced  to 
co-operate  with  the  producers  on  its  line  in  their  strug- 
gles for  the  open  markets ;  in  so  far  as  a  road  is  run  in 
a  far-sighted  way  it  will  tend  to  fix  rates  so  as  to  de- 
velop the  most  efficient  producers,  because  out  of  their 
traffic  it  can  in  the  long  run  get  the  largest  net  earnings. 
If  the  road  favored  weak  producers,  it  would  have  to 
keep  on  favoring  them,  and  could  never  get  as  large 
profits  as  by  letting  that  firm  or  those  firms  which  had 
naturally  the  most  advantages  grow  to  the  fullest  pos- 
sible extent.  Figures  could  be  drawn  showing  how  in 
any  case  where  the  issue  was  clear,  the  road  could  make 
more  profits  out  of  the  shipments  of  the  competitor  who 
was  economically  the  stronger ;  that  it  would  pay  the 
road  to  give  this  man  such  rates  as  to  enable  him  to 
underbid  his  competitors. 

Let  B  and  C  be  producers  on  the  line  leading  to  the 
common  market  A,  and  let  the  price  of  their  common 
product  be  fixed  in  that  market  by  outside  competition 
at  I2C. 


-j-j-l  PRIVATE  AND  PUBLIC  INTERESTS  yy 

A  B  .  C 


I-  8  c. 


B's  unit  cost  of  pro-  "1  C's  unit  cost  of  pro- 
duction    ^  *^'  1 10  c  duction 3  c. 

Cost  of  carriage,  B  to  J         '  Cost  of  carriage,  C  to 

A 2C.J  A 5C.J 

Case  (i) 

Rate  from  B  to  A 5  c.       Rate  from  C  to  A  9  c. 

R.  R.'s  profit 3  c.»       R.  R.'s  profit 4  c. 

Price  at  which  B  can  sell  at  A. 13  c.        Price  at  which  C  can  sell  ...12c. 

Case  (2) 

Rate 4  c.       Rate 10  c. 

R.  R.'s  profit 2  c.        R.  R.'s  profit 5  c.*) 

Price  at  which  B  can  sell  ...  12  c.        Price  at  which  C  can  sell  ...  13  c. 

In  this  case  C  is  the  fitter  to  survive  of  the  two  pro- 
ducers, for  the  social  expense  of  his  service  is  8c  while 
that  of  his  rival's  is  loc.  Moreover,  the  road  can  make 
more  profit  out  of  a  policy  of  letting  C  take  the  business 
away  from  B  than  out  of  the  reverse  policy,  for  in  the 
first  case  the  profit  would  be  4c  and  in  the  latter  2c. 

However,  there  is  a  third  course  open,  and  one  to 
which  common  observation  points  as  the  most  probable, 
namely,  that  of  fixing  rates  so  that  neither  shipper  can 
drive  the  other  to  the  wall,  but  both  are  put  on  an  equal 
footing.  Such  a  policy  may  be  represented  by  the  fol- 
lowing figures : 

Case  (3) 

Rate  from  B  to  A 4  c.       Rate  from  C  to  A 9  c. 

R.  R.'  profit 2  c'      R.  R.'s  profit 4  c. 

Price  at  which  B  can  sell  ...12c.        Price  at  which  C  can  sell  ...  12  c. 

This  illustrates  the  fact  that  the  deductive  line  of  argu- 
ment is  subject  to  many  qualifications.     Indeed,  there  is 

'This  profit  could  not  be  gotten  permanently,  as  the  shipper  would  go 
out  of  business. 

*The  traffic  furnished  by  each  shipper  might  be  less  than  if  he  were 
favored  at  the  other's  expense,  but  that  of  both  together  would  pre- 
sumably be  increased. 


yS  LOCAL  FREIGHT  DISCRIMINATIONS  [78 

an  interesting  analogy  between  the  doctrine  of  compar- 
ative cost  as  applied  to  railway  rates  and  as  applied  to 
international  commercial  policies.  The  gap  between 
"  static  "  theory  and  actual  practice  shows  a  good  deal 
of  similarity  in  the  two  cases.  In  the  first  place,  if  "B" 
and  "C"  represent  two  factories,  the  violent  driving  of 
either  out  of  business  is  a  destruction  of  capital  which 
the  road  would  try  to  avoid.  The  ideal  adjustment 
would  seem  to  be  that  which  would  discourage  B  and 
cause  him  to  move  but  give  him  time  enough  to  do  it 
without  any  considerable  loss.  But  what  road  would  or 
could  make  so  nice  an  adjustment?  Rather  would  the 
tendency  be,  as  suggested  in  the  preceding  chapter, 
to  charge  nine  cents  for  the  haul  from  C  and  four 
cents  from  B,  thus  equalizing  to  the  two  competitors  the 
total  expense  of  laying  their  goods  down  at  A,  permit- 
ting each  producer  to  "meet"  the  competition  of  the 
other  and  so  preserving  both  established  interests. 

Another  complication  also  appears.  The  calculations 
of  the  railroad  are  governed,  not  by  the  actual  costs  of 
production  and  carriage  in  the  two  cases,  but  by  pros- 
pective costs.  In  other  words,  the  "infant  industry" 
reckoning  applies  with  the  fullest  force.  "  C  "  may  be  in 
a  new  and  undeveloped  locality,  with  capacities  for  cheap 
production  which  are  not  yet  realized,  so  that  the  low 
costs  in  the  table  may  be  in  the  future  tense,  actual  costs 
being  much  higher.  In  such  a  case  the  road  is  likely  to 
stimulate  the  infant  traffic  even  though  making  tempo- 
rarily less  on  it  than  on  that  from  older  centers.  But  if 
expectations  are  not  fully  realized — and  the  wonder 
would  be  if  they  were — then  plants,  industries  and 
"interests"  of  all  kinds  have  been  established  which 
could  not  survive  the  test  of  competitive  net  efficiency 
("B's"  factory  in  the  illustrative  diagram).     In  this  case 


79]  PRIVATE  AND  PUBLIC  INTERESTS  79 

the  "established  interests"  standard  demands  that  the 
adjustment  between  the  producers  be  preserved,  as  the 
lesser  of  the  two  losses.'  Here  again  a  comparison  with 
customs-tariff  policies  is  interesting. 

Still  another  disturbing  element  is  due  to  the  fact  that 
the  managements  of  railways  are  not  interested  purely 
and  solely  in  transportation.  So  far  as  this  is  true,  it 
destroys  one  of  the  tacitly  assumed  premises  of  our 
argument,  for  it  brings  in  a  motive  for  pure  favoritism, 
without  any  standards  more  scientific  than  the  wish  to 
further  the  outside  interests  with  which  the  road  is 
allied.'  And,  finally,  it  is  not  true  in  practice  that  the 
rates  of  a  large  railway  system  can  in  all  details  con- 
tribute perfectly  and  exactly  to  some  unified  centralized 
policy.  Such  a  state  of  things  would  require,  not  a 
traffic  department  made  up  of  many  finite  human  beings, 
but  rather  a  single  Argus-eyed  and  omniscient  traffic 
manager.  The  organization  of  a  railroad  does  not  form 
an  absolutely  perfect  machine,  even  for  the  finding-out  and 
following-out,  in  the  very  best  way,  of  advancing  its  own 
interests,  complicated  as  these  are.  ^  One  cannot  help 
wondering  whether  the  partial  adoption  of  uniform 
rules,  like  the  German   or  Austrian,   might   not  so  sim- 

'"  Missouri  Rate  Case"  (Burnham,  Hanna  &  Munger  Dry  Goods 
Co.,  etc.)  decided  June  24,  1908;  appealed  to  U.  S.  Circuit  Court;  in- 
junction issued,  and  made  permanent  Aug.  24,  igog.  Also  Paper  Mills 
Co.  of  Baltimore  v.  Penn.  R.  R.  et  al,  Oct.,  '07.  Also  "Hutchison 
Salt  Case,"  5  Int.  Com.  Rep.,  299. 

'This,  as  recognized  in  the  legal  battle  over  the  "commodities 
clause"  of  the  Hepburn  act,  constitutes  a  separate  and  most  difScult 
problem  of  regulation,  and  to  discuss  it  would  lead  the  present  argu- 
ment too  far  afield. 

^See  Quimby  et  al.  v.  Clyde  S.  S.  Co.  et  al.,  12  Int.  Coin.  Rep.,  92. 
In  this  case  after  a  consolidation  certain  rates  were  raised,  with  the  re- 
sult that  a  water  carrier  took  most  of  the  traffic. 


/  . 


8o  LOCAL  FREIGHT  DISCRIMINATIONS  [go 

plify  matters  as  to  prove  a  real  boon  to  the  roads  with- 
out any  commensurate  losses.  At  least  one  prominent 
American  railroad  president,  Mr.  A.  B.  Stickney,  long 
ago  voiced  this  opinion, '  saying  that  tariffs  could  be 
^  mathematically  constructed  which  would  follow  the  com- 
j  parative  cost  principle,  and  would  be  "  symmetrical, 
equitable,  and  satisfactory."  But  until  some  such  policy 
is  generally  followed  out,  the  proof  of  the  actual  relation 
between  "  market  competition "  and  discriminations 
must  be  sought  in  actual  practices  in  concrete  cases. 
It  is  not  hard  to  cite  cases  in  which  this  kind  of  com- 
petition seems  to  act  very  unreasonably,  and  these  cases 
may,  after  a  fashion,  be  classified.  For  instance,  where 
the  railroad  is  the  only  ef^cient  outlet  to  market  for 
some  product  of  natural  resources,  agricultural  or  min- 
eral, there  is  a  strong  tendency  for  the  charge  to  absorb 
the  whole  of  the  clear  rent  or  royalty.  This  tendency  is 
interfered  with  in  cases  when  the  station  in  question 
draws  traffic  in  that  particular  commodity  from  lands  or 
ore-beds  of  varying  grades  of  productiveness  or  from 
farms  of  varying  fertility  or  distance  from  the  line. 
Here  a  change  of  rate  would  affect  the  margin  of  culti- 
vation, and  the  road  can  do  best  by  making  a  rate  which 
allows  considerable  rents  or  royalties  on  the  richest  ore 
veins  and  the  most  fertile  and  accessible  farms. 

The  writer  was  once  told  of  an  incident  illustrating 
this  principle  as  affecting  mine  products.  In  this  case 
the  price  of  the  ore  at  the  market  rose  suddenly,  and  the 
mine  owner,  who  expected  the  usual  rate  on  his  next 
large  shipment,  was  told  :  "  Your  ore  is  worth  more 
than  it  was,  and  can  afford  to  pay  more.  Your 
rate   will    be    so   much,"    naming    a   figure   that   would 

^Railway  Age,  Sept.,  1905,  p.  399. 


8i]  PRIVATE  AND  PUBLIC  INTERESTS  gl 

absorb  the  entire  rise  in  value  of  the  ore.  Argument 
was  useless ;  the  rate  was  fixed.  But  the  owner  was 
both  angry  and  resourceful.  He  chartered  a  sailing 
vessel  and  sent  a  large  cargo  of  ore  around  Cape  Horn. 
Then  the  traffic  men  at  once  came  to  him,  saying  :  "  Why 
didn't  you  tell  us  what  you  were  going  to  do?  We'd 
have  made  you  a  better  rate.  We  will  make  you  one." 
And  they  did. 

This  case  suggests  a  kind  of  rate-fixing  under  the 
value  principle  to  which  the  people  as  a  whole  would  be 
very  loth  to  trust  themselves.  Much  the  same  thing 
would  be  true  of  other  kinds  of  produce  than  ore. 
Louisiana  farmers  have  made  complaints  because  rates 
on  potatoes  to  New  Orleans  were  fixed  from  time  to 
time  as  the  price  varied,  at  levels  that  absorbed  all  the 
possible  net  returns  to  the  grov^^ers.  Under  such  condi- 
tions the  tendency  of  competition  to  cause  society  to  be 
served  by  the  cheapest  possible  producers  is  seriously 
interfered  with.  The  self-interest  of  the  roads  in  such 
varying  circumstances  does  not  tend  to  produce  that 
equality  of  treatment  which  society's  interests  demand. 

In  the  cases  so  far  taken,  the  situation  is  such  that  the 
volume  of  shipments  will  not  vary  much  with  moderate 
variations  of  rates.  Land  and  natural  resources  cannot 
move  and  are  almost  bound  to  be  utilized,  and  the  prob- 
lem is  thus  made  unusually  simple.  In  the  case  of  prod- 
ucts of  manufacturers,  finished  or  unfinished  goods, 
things  are  more  complicated.  In  such  cases,  the  traffic 
may  vary  very  much  with  slight  changes  in  rates.  Cap- 
ital can  move,  the  existing  industries  may  succeed  or 
fail  in  securing  any  given  market,  they  may  prosper  or 
be  wiped  out,  while  potential  investments  of  capital  are 
absolutely  free  to  go  where  they  please  and  increase  the 
traffic  of  the  line  that  makes  them  the  best  terms.     This 


82  LOCAL  FREIGHT  DISCRIMINATIONS  [82 

indirect  competition  which  acts  at  local  points  does 
then  work  in  varying  grades  of  intensity.  In  general  it 
may  be  said  that  rates  from  local  points  to  common 
markets  on  products  of  mobile  labor  and  capital  feel  its 
effects  in  the  most  definite  and  compelling  way,  especially 
if  the  industry  used  potential  competition  as  a  weapon 
and  made  a  bargain  as  to  future  rates  before  establish- 
ing itself. 

In  the  case  of  products  of  natural  resources,  where 
clear  ground  rent  or  royalty  is  a  large  element  in  the 
cost  of  production,  the  margin  of  choice  left  to  the  rail- 
way in  fixing  its  charges  is  much  wider,  the  "  compe- 
tition "  is  less  immediate  and  compelling,  the  loss  of 
traffic  due  to  high  rates  is  less  in  quantity,  or  at  least 
is  more  remote  in  time.  The  money  saved  the  shippers 
by  low  rates  goes  in  considerable  part  to  the  owners  of 
natural  resources  as  clear  rent.  As  such,  it  contributes 
to  the  prosperity  of  the  region,  to  its  purchasing  power, 
and  to  its  general  attractiveness  to  settlers  and  to  new 
capital ;  but  in  no  such  immediate  way  as  if  the  money 
went  for  paying  wages  and  interest  to  labor  and  capital 
which  would  otherwise  not  settle,  or  would  be  forced  to 
move  away.  The  fear  of  a  definite  immediate  loss  cannot 
fail  to  be  a  stronger  motive  than  the  hope  of  vague  gain 
in  the  indefinite  future.  So,  just  in  proportion  as  the 
commodity  in  question  is  the  product  of  a  natural  re- 
source bearing  a  clear  rent  or  royalty,  is  the  force  of 
"  market  competition  "  weakened.  Similarly  the  rates 
to  these  local  points  on  the  raw  materials  of  production 
may  be  regarded  as  complementary  to  the  out-bound 
rates  on  the  products,  and  subject  to  the  same  influence 
in  each  case. 

The  local  rates  (or  final  portion  of  a  through  rate)  on 
consumption  goods  to  the  local  points  on  a  railway  con- 


83]  PRIVATE  AND  PUBLIC  INTERESTS  83 

stitute  the  largest  class  of  cases  remaining  to  be  covered 
under  the  general  head  of  "  indirect  competition."  These 
affect  the  cost  of  living  and  general  attractiveness  of  a 
locality.  Thus  they  are  one  of  the  considerations  which 
a  manufacturer  who  thinks  of  settling  must  directly  or 
indirectly  take  into  account.  But  the  road  would,  of 
course,  never  use  such  rates  in  making  a  definite  bargain 
with  a  prospective  industry  or  in  nursing  along  an  exist- 
ing one.  It  would  be  wasteful,  and  the  effect  so  vague 
as  to  be  hardly  felt  at  all.  So  these  rates  must  be  classed 
with  those  affected  by  the  weaker  motive  of  desire  for  a 
prosperous  constituency  rather  than  under  the  stronger 
one  of  active  market  competition  for  a  particular  line  of 
traffic.  It  might  seem  that  these  last  cases  should  not 
be  separated  from  the  others,  as  they  are  merely  the 
same  processes  seen  from  the  other  end.  Carrying 
goods  to  a  market  where  they  must  be  sold  under  com- 
petition is  the  same  process,  whether  you  sit  at  the  mill 
and  watch  them  go,  or  sit  at  the  market  and  watch  them 
come.  But  there  is  a  real  difference  between  what  may 
be  called  the  "efferent"  and  the  "afferent"  types  of 
market  competition.  In  the  latter  the  market  is  a  local 
point,  and  while  many  producers  may  compete  for  it, 
they  must  all  use  the  local  line  to  reach  it.  So  that  the 
road  need  use  no  concessions  to  attract  this  traffic,  either 
by  making  low  locals  from  its  own  producing  points,  or 
by  accepting  low  proportionals  of  through  rates.  In- 
deed there  may  be  a  special  motive  for  the  road  to  make 
the  proportion  of  the  through  rates  even  higher  than  its 
locals  for  the  same  distance'  in  order  to  keep  the  "home 
market"  for  producers  on  its  own  line,  and  perhaps  get 

iBlackwell  Milling  and  Elevator  Co.  v.   M.,  K.  &  T.   Ry.  Co.,  12 
Int.  Com.  Rep.,  23,  declares  this  latter  practice  unreasonable. 


84  LOCAL  FREIGHT  DISCRIMINATIONS  [84 

a  more  profitable  haul  for  itself.  Such  a  practice,  of 
course,  violates  the  comparative-cost  standard,  for  a 
through  haul  normally  costs  less  than  the  sum  of  the 
local  hauls.  To  the  forces  governing  this  kind  of  traf^c, 
as  well  as  that  in  products  of  clear  gifts  of  nature,  the 
term  "competition,"  with  whatever  qualifications  used, 
is  misleading. 

Another  source  of  discrimination  under  market  com- 
petition is  the  natural  attitude  of  a  traffic  man  who  sees 
no  difference  between  developing  the  fittest  producers  on 
his  line,  and  giving  special  favors  to  some  few  chosen 
ones  and  so  giving  nobody  else  a  chance.'  It  is  the  same 
attitude  already  alluded  to,  and  expressed  by  a  railroad 
official  in  the  days  of  rebates  when  he  said  in  substance, 
of  the  trunk-line  competition  for  grain,  "  It's  no  use  to 
lower  the  published  rates  for  everybody.  What  helps 
our  traffic  most  is  to  pick  out  one  good  hustler,  give 
him  a  special  rate  and  let  him  scoop  the  business."  Thus 
the  big  company  still  has  an  undue  advantage  in  bar- 
gaining under  "market  competition  "  and  may  obtain  on 
the  "infant  industry"  pretext  a  protection  to  which  it 
has  no  economic  right. 

Finally  the  adjustments  of  market  competition,  once 
imade,  tend  to  ossify.  They  probably  suited  fairly  well 
the  conditions  existing  when  they  were  made,  but  as 
conditions  change  and  rate  adjustments  do  not,  the  lat- 
ter may  become  anomalous.  Such  adjustments  are  of 
two  main  types.  On  the  one  hand,  there  are  those  aim- 
ing to  divide  the  field  and  give  each  road,  system  or 
section  control  of  certain  markets  or  of  the  sale  of  cer- 
tain goods  in  common  markets.     And  on  the  other  hand 

'Texas  Cement  Plaster  Co.  v.  St.  Louis  &  'Frisco  R.  R.  Co.,  12 
Int.  Com.  Rep.,  68,  illustrates  the  delicate  problem  of  deciding  whom 
to  favor  effectively  and  where  to  draw  the  line. 


85]  PRIVATE  AND  PUBLIC  INTERESTS  85 

are  those  aiming  to  put  the  competitors  on  an  equal 
footing  over  a  considerable  area  which  each  considers 
his  logical  market. 

As  an  instance  of  the  first  kind,  what  amounted  to  a 
widespread  sectional  discrimination  has  resulted  from  an 
adjustment  intended  to  secure  to  each  of  two  sets  of 
roads  the  traffic  in  the  products  to  which  its  region  was 
at  that  time  particularly  suited.'  In  this  case  the  rates 
on  the  numbered  classes,  covering  most  of  the  manu- 
factures and  merchandise,  were  in  i"878  made  unusually- 
high  as  compared  to  the  rest  of  the  schedule  on  lines 
from  the  central  section  to  the  south.  The  purpose  of 
this  was  to  give  lines  from  the  East  all  the  traffic  in  such 
articles,  and  those  from  the  central  section  that  in  food- 
stuffs and  other  low-grade  goods.  According  to  the 
announcement  of  the  manager  of  the  Southern  Railway 
Association,  the  rates  on  manufactures  from  the  central 
section  were  meant  to  be  prohibitive.  But  in  the  fifteen 
years  which  followed  this  adjustment,  the  centers  of  pro- 
duction, both  manufacturing  and  agricultural,  moved 
westward.  The  central  section  began  to  manufacture, 
and  the  bulk  of  food  production  moved  farther  west, 
while  the  central  manufacturers  were  hampered  in  seek- 
ing their  natural  markets  by  the  dead  hand  of  an  out- 
grown competitive  bargain  in  rates.  In  suiting  rates  to 
existing  conditions,  the  roads  had  suited  them  admirably 
to  the  blocking  of  normal  progress. 

Another  very  suggestive  case  is  that  of  the  Lincoln 
Commercial   Club   against    the    Rock    Island    Railroad.' 

'"Cincinnati  Freight  Bureau  Case,"  6  Int.  Com.  Rep.,  195.  Over- 
ruled on  grounds  of  lack  of  jurisdiction  in  "Maximum  Rate  Case," 
167  U.  S.,  479- 

^Lincoln  Commercial  Club  v.  C.  R.  I.  &  Pac.  Ry.  Co.,  13  Int. 
Com.  Rep.,  319. 


86  LOCAL  FREIGHT  DISCRIMINATIONS  [86 

This  illustrates  the  practice  of  "just  meeting"  existing 
competition  and  the  anomalies  it  leads  to,  especially  as 
conditions  of  production  change.  The  case  deals  with 
rates  on  certain  products  from  points  in  Kansas  and  ter- 
ritory south  and  west  of  the  Mississippi,  which  were 
made  higher  to  Lincoln,  Neb.,  than  to  Omaha,  though 
the  distances  and  costs  of  hauling  were  in  each  case  sub- 
stantially the  same.  These  rates  were  made  in  competi- 
tion with  products  coming  from  the  east,  and  had  "just 
met"  that  competition  in  both  of  the  markets  in  ques- 
tion, accepting  the  existing  differential,  which  was  a 
natural  one  for  shipments  coming  from  the  east,  but 
quite  unnatural  for  shipments  from  the  south.  It  ap- 
pears then  that  in  competition  for  several  different 
markets  in  the  same  region  the  differentials  likely  to 
prevail  are  those  made  by  the  older  route,  which  had  the 
bulk  of  the  traffic  when  the  competition  began.  The 
shipments  by  the  other  line  begin  as  "outposts  of  com- 
petition," uninvited  guests  who  slip  in  with  as  little  dis- 
turbance as  possible  and  take  things  just  as  they  find 
them.  They  accept  an  adjustment  that  is  anomalous  for 
them,  but  natural  for  the  bulk  of  the  traffic. 

But  now  conditions  change  and  centers  of  production 
move  until  the  interloper  carries  the  bulk  of  the  traffic;  and 
now  a  small  volume  of  shipments  is  carried  at  naturally 
adjusted  rates  and  an  anomalous  differential  is  imposed 
on  the  bulk  of  the  traffic.  This  is  what  happened  to 
some  of  the  articles  in  the  case  referred  to,  so  that  here 
again  competition  of  markets  caused  a  violation  not  only 
of  the  comparative-cost  principle,  but  of  ordinary  com- 
mon sense. 

Indeed,  the  practice  of  "just  meeting"  existing  com- 
petition regularly  causes  departures  from  this  principle 
of  reasonableness.     It  means  that  the  weaker  producer 


87]  PRIVATE  AND  PUBLIC  INTERESTS  87 

regularly  gets  a  lower  rate  to  put  him  on  a  level  with 
the  stronger,  and  the  road  serving  the  latter  seems  often 
unable  to  prevent  this. '  Apparently  the  producer's 
very  strength  is  a  source  of  weakness  in  bargaining  with 
the  roads.  For  he  will  get  along  somehow  and  market 
a  fair  volume  of  goods  even  if  others  get  special  rates, 
so  that  to  the  road  he  deals  with,  it  is  a  question  of  a 
slight  increase  in  the  volume  of  a  traffic  that  is  fairly 
satisfactory  as  it  is.  But  to  the  roads  serving  the  weak 
producers  it  is  a  question  of  some  traffic  or  none  at  all, 
with  perhaps  a  ruined  business  and  a  bad  "black  eye" 
for  the  towns  on  their  line.  The  latter  motive  is  the 
stronger ;  it  is  the  old  story  of  the  weaker  member 
proving  the  more  formidable  in  competition  through  his 
very  weakness. 

To  summarize,  then,  market  competition  provides  a 
motive  to  develop  the  most  efficient  producers  on  the 
line.  This  could  be  done  by  a  general  application  of  the 
comparative  cost  standard,  with  exceptions  in  favor  of 
"  infant  industries."  But  in  practice  it  is  found,  first, 
that  this  competition  applies  principally  to  one  special 
kind  of  shipments,  namely  products  of  mobile  labor  and 
capital,  (manufactures  mostly)  moving  to  markets  where 
railroad  competition  exists.  To  other  kinds  of  traffic  it 
applies  only  with  homeopathic  force.  Moreover  it  leaves 
discretion,  and  hence  room  for  favoritism,  in  the  treat- 
ment of  local  producers,  especially  in  the  use  (legitimate 
in  some  cases)  of  an  "infant  industry"  policy  which 
must  violate  short-run  standards  of  reasonableness. 
Further,  in  stimulating  its  own  producers  a  road  may 
unreasonably  hamper  shipments  coming  from  other  lines 
and  the  practice  of  "  adjusting  rates  to  industrial  condi- 

'"  Eau  Claire  Lumber  Case,"  5  Int.  Com.  Rep.,  264.     Also  Hutch- 
ison Salt  Case,  5  Int.  Com.  Rep.,  299. 


88  LOCAL  FREIGHT  DISCRIMINATIONS  [88 

tions,"  when  it  takes  the  form  of  dividing  the  field,  tends 
to  keep  the  industries  rigid  when  conditions  call  for 
change;  while  the  alternative  practice  of  "just  meeting" 
existing  competitition  over  a  considerable  area  also  leads 
in  a  different  way  to  violations  of  reasonable  standards 
which  get  worse  as  centers  of  production  move.  And 
in  particular,  it  appears  that  in  market  competition  as  in 
the  direct  kind,  between  a  poor  road  and  a  rich  one,  the 
I  weaker  producer  may  through  his  very  weakness  be  the 
I  stronger  competitor  and  so  again  standards  of  reasonable- 
ness maybe  violated  and  the  fittest  lose  his  just  rewards. 
Thus  the  question  whether  market  competition  affords 
in  itself  a  guarantee  of  fairly  reasonable  rate  adjustments 
seems  answered  decidedly  in  the  negative. 


(^^n 


^5. 


"'o 


CHAPTER  V 

RAILWAY  RATES  AND  COMMERCIAL  POLICY. 

One  further  phase  of  the  conflict  between  public  and 
private  interests  in  rate  fixing  may  be  mentioned  here  : 
namely  the  bearing  of  railway  rates  on  the  protective 
tariff  system  of  the  nation.  Volumes  might  be  written 
on  this  subject  alone.  Even  in  Continental  Europe  the 
rates  are  regarded  as  very  imperfect  from  the  point  of 
view  of  furthering  the  commercial  policies  of  the  nations,' 
while  in  our  own  country  the  import-rate  policy  of  the 
roads  runs  directly  counter  to  the  government's  policy  of 
high  protection.  It  goes  without  saying  that  these  two 
phases  of  the  cost  of  international  commerce,  viz.,  rail- 
way rates  and  tariff  duties,  are  of  necessity  intimately/ 
bound  up  with  one  another ;  and  that  a  nation  which 
possesses  a  well-defined  tariff  policy  cannot  overlook  the 
question  of  railway  charges,  if  that  policy  is  to  be  sys- 
tematically carried  out.  On  this  question  one  German 
work  takes  a  rather  extreme  position,^  and  develops  to 
its  fullest  extent  the  possibilities  of  a  railway  rate  system 
as  a  supplement  to  a  modern  protective  tariff.  The 
present  Continental  freight-rates  do  co-operate  in  some 
respects  with  the  Imperial  commercial  policy,  say  the 
authors,  but  only  in  single  measures,  lacking  unity  and 
not  adapted  to  further  such  policy  in  a  systematic  and 

'  Seidler  &  Freud,  Die  Eisenbahntarife  in  ihren  Beziehungen  zur 
Handelspolitik,  1904,  pp.  4-6  et  passitn. 

'Seidler  &  Freud,  op.  cit. 

89]  89 


90  LOCAL  FREIGHT  DISCRIMINATIONS  [90 

effective  way.  In  support  of  the  need  for  such  close 
co-operation,  Bismark's  letter  to  the  Bundesrath,  Dec. 
15,  1878,  is  quoted,  voicing  the  need  of  a  revision  of 
railway  tariffs  concurrently  with  that  of  the  customs 
duties.  Since  that  time,  it  is  claimed,  there  has  been 
little  progress  toward  that  ideal. 

Concretely,  several  faults  are  pointed  out  in  the  Ger- 
man system.  In  the  first  place,  imported  goods  receive 
the  same  classification  as  those  of  home  manufacture. ' 
One  must  needs  wonder  why  this  is  such  a  heinous  fault, 
especially  since  a  discrimination  in  classification  against 
foreign-made  goods  would  result  in  giving  the  highest 
protection  to  those  home  producers  who  serve  markets 
far  from  the  frontier  and  who  thus  need  it  least. 
Secondly,  where  imported  goods  travel  far  inland  and 
get  the  benefit  of  the  falling  scale  of  rates  on  the  long 
haul,  protection  is  thereby  neutralized. '^  Thirdly,  it  is 
urged  that  the  benefits  of  the  Ausfiahmetarife  ought 
to  be  denied  to  imported  goods  instead  of  being  general. ' 
And  fourthly  it  is  maintained  that  concessions  granted 
to  foreign  goods  and  not  to  home  goods,  even  though 
made  necessary  by  direct  competition,  should  either  be 
withdrawn  or  made  general. ^  This  applies  to  all  import- 
rates  which  charge  less  for  the  inland  section  of  a  long 
through  haul  than  would  be  charged,  according  to  the 
distance-scales,  if  the  shipment  originated  at  the  frontier. 
Thus  the  writers  are  protesting  against  the  familiar  prac- 
tice of  making  the  through  rate  less  than  the  sum  of  the 
included  locals,  when  that  policy  is  applied  to  import- 
shipments.     However,  that  principle  does  seem  to  have 

*  Seidler  &  Freud,  op.  cit.,  p.  26. 

^Ibid.,  p.  27.  ^Ibid.,  p.  28. 


c^l]        RAILWAY  RATES  AND  COMMERCIAL  POLICY         gj 

been  somewhat  excessively  applied,  as  in  the  following 
instance  '  of  rates  on  grain. 


Haul. 


Distance. 


Sissek  to  Vienna  (for- 
eign grain) 1    507  km. 


Stiickgut. 


5,000  Kg. 


218  Heller  \  218  Heller 


Lobosits  to  Vienna 

(Austrian  grain) '    495  km.    I384  Heller   284  Heller 


10,000  Kg. 

218  Heller 
284  Heller 


However,  one  can  hardly  imagine  an  American  pro- 
testing against  any  such  mild  reduction  in  favor  of  the 
import-traffic,  since  in  Hungary,  from  which  the  case  is 
taken,  the  through  rates  are  fixed  less  arbitrarily  than 
with  us  and  according  to  definite  rules.  Either  the  two 
locals  are  added  and  one  "terminal-charge  "  subtracted, 
or  else,  if  some  shorter  competing  line,  figuring  in  this 
same  way,  work  out  a  lower  rate,  such  a  lower  rate  of  an 
actual  competing  route  may  be  taken  over  bodily.  Of 
course,  in  such  a  case,  the  inland  proportional  of  the 
rate  might  easily  be  so  low  as  to  violate  the  long-and- 
short-haul  principle.  But  even  so,  the  discrimination  is 
not  nearly  so  great  as  is  possible  under  the  American 
system,  since  the  charge  bears  a  definite  relation  to  the 
sum  of  the  local  charges  over  the  shortest  route. 

However,  there  are  other  practices  common  in  Europe 
which  tend  to  reinforce,  rather  than  weaken,  the  tarifif 
barriers.  Such  are  reductions  granted  only  to  goods  of 
home  production.  These  often  take  the  form  of  special 
rates  from  definite  points  of  origin  to  all  destinations  or 
to  single  stations  or  groups.  These  can  be  so  managed 
that  the  foreigner  secures  no  benefit.     Specially  low  ex- 


'Seidler  &  Freud,  op.  cit.,  p.  36. 


92  LOCAL  FREIGHT  DISCRIMINATIONS  [92 

port  rates  are  another  means  of  warfare,  tending  to 
neutralize  the  adversary's  tariff.  In  short,  the  situation 
suggested  is  one  of  tariff  wars  of  railway  rates  as  well  as 
of  customs  duties,  with  the  inevitable  result  that  such 
railway  rates  must  become  material  for  commercial  treat- 
ies and  so  become  involved  in  politics  to  an  indefinite 
extent. 

In  reading  this  argument,  or  prediction,  one  cannot 
help  recalling  the  story  of  the  man  who  attempted  sui- 
cide by  poison,  shooting,  hanging  and  drowning  all  at 
once,  and  was  frustrated  by  the  completeness  of  his 
preparations.  If  not  only  customs  duties  but  railway 
tariffs  also  be  involved  in  the  protective  system,  will  it 
not  become  too  unwieldy,  complicated  and  obscure?  Is 
it  well  that  the  exact  amount  of  protection  should  be  so 
lost  in  the  mazes  of  rate-differentials  as  to  be  virtually 
impossible  of  human  discovery?  And  is  it  a  uniform  and 
consistent  means  of  protection  to  burden  the  foreign 
shipper  with  higher  mileage-charges,  which  hamper  him 
but  little  at  points  near  the  frontier  but  are  increasingly 
felt  as  he  penetrates  the  interior?  Does  not  this  dis- 
criminate against  the  home  producer  who  is  situated 
near  the  frontier,  and  also  against  the  consumers  dwell- 
ing in  the  central  parts  of  the  country?  It  may  be  that 
special  and  definite  concessions  in  the  matter  of  railway 
rates  are  more  convenient  than  more  general  ones,  as 
pawns  in  the  chess-game  of  commercial  treaties — that 
it  is  possible  to  do  better  bargaining  by  grading  one's 
concessions  carefully  and  dealing  differently  with  differ- 
ent countries  instead  of  being  forced  to  extend  to  all  the 
"  most  favored  nations  "  concessions  made  to  any  one  of 
them.  And  as  a  result,  it  may  be  that  the  European 
powers  will  make  railway  rate  discriminations  subjects 
of  international  agreement  in  order  to  have  something 


93]        RAILWAY  RATES  AND  COMMERCIAL  POLICY  93 

with  which  they  can  bargain  freely.'  But  on  the  other 
hand,  if  it  is  freedom  in  balancing  concessions  which  is 
desired,  would  it  not  be  possible  to  secure  this  by  merely 
adopting  the  American  interpretation  of  the  "most  fav- 
ored nations"  principle?  As  is  well  known,  European 
nations  hold  that  a  concession  granted  to  any  nation  is 
automatically  and  freely  extended  to  all  who  are  on  a 
"  most  favored  nations  "  basis.  America,  on  the  other 
hand,  reserves  the  right  to  sell  special  concessions  to  any 
country  whatsoever,  and  holds  that  it  is  merely  bound  to 
offer  the  "  most  favored  nations  "  the  chance  to  duy  the 
same  concessions  at  the  same  or  an  equivalent  price  in  the 
shape  of  return  favors.  Some  think  that  Europe  is  tend- 
ing to  adopt  this  latter  interpretation,'  and  if  that  be  true, 
it  would  seem  to  ofifer  all  necessary  freedom  for  the  con- 
venience of  the  international  commercial  bargain-counter. 

Moreover,  protective  tariffs  are  avowedly  matters  of 
interference  with  natural  economic  forces,  which  is  just 
what  railway  charges,  for  the  most  part,  strive  to  avoid. 
If  there  are  any  general  economic  principles  on  which 
rates  can  be  based,  and  if  the  rates  in  any  given  country 
are  based  in  a  general  way  on  such  principles,  is  it  not 
better  that  any  variation  from  such  general  principles 
should  not  be  incorporated  in  the  rate  system,  but  be 
kept  separate,  to  the  end  that  the  extent  and  nature  of 
the  artificial  protection  may  be  more  clearly  seen  and 
wisely  handled? 

So  far  we  have  been  considering  the  distortion  of  rate 
systems  to  supplement  and  cooperate  with  protective 
tariffs.  In  the  United  States  the  problem  assumes  the 
opposite  shape.  It  is  claimed  that  the  discriminations 
in  favor  of  import  traffic  tend  to  neutralize  the  protective 

*Seidler  &  Freud,  op.  cit.,  p.  145  et  passim.  *Ibid.,  pp.  152-3. 


g^  LOCAL  FREIGHT  DISCRIMINATIONS  [94 

tariff  by  giving  the  foreigner  very  markedly  lower  rates 
than  the  home  producer.  This  has  of  course  two  bad 
sides.  If  the  tariff  were  merely  high  enough,  on  a  basis 
of  equal  treatment  in  rates,  then  by  these  special  favors 
protection  would  be  made  insufficient.  And  on  the 
other  hand,  if  the  tariff'  were  too  high,  that  fact  would 
be  partially  neutralized  and  thereby  concealed,  so  that 
the  public  might  continue  an  iniquitously  framed  law 
because  they  had  been  prevented  from  feeling  the  full 
effects  it  would  have  wrought,  if  the  foreigner  had  not 
been  granted  neutralizing  concessions. 

In  this  connection  the  fact  of  most  significance  is  :  to 
what  extent  do  the  import  rates  actually  neutralize  the 
tariff?  In  this  matter  a  rough  and  rapid  calculation 
which  the  writer  once  made  may  prove  suggestive  if  not 
conclusive.'  A  list  was  made  of  32  articles  and  groups 
of  articles  on  which,  in  1903,  commodity  rates  were 
quoted  from  the  seaboard,  and  for  these  articles  the 
average  differential  between  the  import  and  domestic 
rates  to  eight  representative  cities  was  taken,  also  the 
duty  per  100  pounds,  as  nearly  as  could  be  quickly  esti- 
mated, on  each  of  these  articles.  The  following  were 
the  results  obtained :  Firstly,  the  domestic  rates  ex- 
ceeded the  import  rates  by  percentages  varying  from  8>^ 
per  cent,  to  70  per  cent.,  and  averaging  (unweighted) 
about  37  per  cent.  Secondly,  the  domestic  rates  ex- 
ceeded the  import  rates  by  amounts  averaging  (weighted) 
approximately  4  cents  per  100  pounds  on  dutiable  goods 
and  6  cents  per  100  pounds  on  those  goods  in  the  list 
which  were  duty-free.  Thirdly,  with  regard  to  the 
average  amount  of  duty  paid  by  the  goods  in  question, 

'Data  taken  from  57th  Cong.,  2d  sess.,  Senate  document  no.  207. 
Data  for  weighting  averages  and  transposing  duties  taken  from 
Monthly  Summary  of  Commerce  and  Fhiance  for  corresponding  date. 


95]        RAILWAY  RATES  AND  COMMERCIAL  POLICY  g^ 

the  difficulty  of  reducing  the  schedules  to  commensurate 
terms,  of  cents  per  lOO  pounds,  was  so  great  that  only 
a  rough  approximation  was  made.  However,  it  may  be 
said  that  the  average  duty  per  loo  pounds  paid  by  the 
dutiable  articles  in  this  list  was  certainly  not  less  than 
19  cents  nor  more  than  25  cents.  Thus  it  appears  that 
the  import  rates  neutralized  something  between  16  per 
cent,  and  21  per  cent,  of  the  tariff  duties.' 

Such  an  amount  is  appreciable  but  not  startling.  As 
far  as  the  calculation  proves  anything,  it  furnishes  an  in- 
stance of  the  fact  that  the  private  interest  of  the  railroads 
does  run  counter  to  the  national  policy  of  protection, 
and  weakens  it  perceptibly. 

'  It  is  not  claimed  that  this  is  accurate,  but  merely  a  rough  approxi- 
mation. The  translation  of  the  duties  into  terms  of  100  lb.  units  would 
of  itself  prove  an  almost  endless  task  if  exact  accuracy  were  sought, 
while  the  choice  of  the  "representative"  cities  to  which  the  rates 
were  taken,  offers  further  chance  for  error,  in  that  the  choice  could  not 
be  made  the  fairest  one  for  all  the  separate  cases. 


CHAPTER  VI 

THE  GENERAL  LEVEL  OF  CHARGES. 

Having  now  considered  the  natural  or  free  workings 
of  economic  forces  under  present  conditions  and  found 
them  wanting  from  the  point  of  view  of  reasonableness, 
the  question  naturally  occurs — can  any  system  be  de- 
vised which  could  pass  such  a  test  perfectly — which  could 
be  shown  to  be  right  in  every  case  or  even  in  most 
cases?  Does  the  "natural  system"  exist  in  the  realm  of 
the  possible?  In  attacking  this  question,  it  may  be  best 
to  get  out  of  the  way  at  the  start  the  largest  and  most 
fundamental  question — that  of  the  natural  or  reasonable 
total  return,  inasmuch  as  it  has  some  bearing  on  the 
question  of  relative  charges. 

The  almost  universal  answer  is  that  gross  earnings  should 
be  such  as  to  cover  all  outlays :  total  returns  should 
equal  total  cost,  including  of  course  interest  on  the  in- 
vestment. This  proposition  seems  so  obvious  to  most 
people  that  it  may  be  worth  while  mentioning  that  it  is 
not  completely  self-evident.  In  the  first  place,  it  is  not 
always  easy  to  strike  just  the  correct  balance  between 
the  two  public  motives  involved — that  of  a  public  busi- 
ness enterprise  and  that  of  a  public  servant. 

When  a  community  goes  into  the  business  of  transpor- 
tation and  becomes  an  entrepeneur,  it  has,  as  an  entre- 
preneur, exactly  the  same  motives  as  any  private  person. 

This  fact  has  been  very  practically  demonstrated  in  the 
96  [96 


•^ 


gy]  THE  GENERAL  LEVEL  OF  CHARGES  97 

matter  of  relative  rates  wherever  state  roads  have  come 
into  active  competition  v^^ith  private  carriers,  has  hap- 
pened, for  example,  in  Belgium  before  the  purchase  of 
the  private  roads  by  the  state  which  began  in  1870.  Far 
from  following  a  purely  public  policy,  the  state  lines 
were  forced  to  meet  the  private  roads  on  their  own  I 
ground,  and  to  imitate  their  discriminations  and  compe- 
titive practices  in  general.  Under  competition,  the  self- 
interest  of  the  road  as  such  is  paramount. 

Wherever  competition  is  absent,  however,  a  state  road 
is  freer  to  choose  its  own  policy,  and  to  balance  its  own 
interest  as  a  producer  against  the  other  motive  it  has  in 
view  :  namely,  the  interests  of  the  body  of  citizens  as 
producers  and  consumers.  But  it  will  never  forget  its 
interest  as  a  business  corporation.  The  public  here 
plays  two  opposing  roles,  that  of  the  producer  of  trans- 
portation and  that  of  the  consumer,  and  the  balancing  of 
its  interests  in  these  two  aspects  is  not  absolutely  simple. 
Various  policies  are  followed,  as  everyone  knows,  in  the 
various  public  and  quasi-public  services,  policies  which 
run  all  the  way  from  that  of  high  monopoly  profits  to 
that  of  free  gift,  supported  by  taxes.  And  in  transporta- 
tion itself  we  find  side  by  side  with  each  other  systems 
of  free  highroads,  canals  on  which  the  tolls  pay  for  main- 
tenance and  operating  expenses  but  nothing  toward  in- 
terest, and  railroads  whose  earnings  run  up  to  the  point 
of  considerable  net  profits  over  all  expense. 

In  the  broad  realm  of  public  finance,  of  course,  the  ele- 
ment that  decides  the  issue  between  a  gift  policy  and  a 
price  policy  is  the  fact  that  some  services  are  of  "  gen- 
eral "  rather  than  "  special  "  benefit.  That  is,  the  direct 
benefits  may  accrue  to  certain  people  only  in  such  a  way 
that  the  recipient  can  be  made  to  pay  and  so  support 
the  enterprise.     If  this  is  not  the  case,  the  benefits  are 


98  LOCAL  FREIGHT  DISCRIMINATIONS  [98 

general,  and  must  be  borne  by  the  general  public  out  of 
its  common  treasury.  Then  there  are  cases  where  there 
are  not  only  special  benefits,  but  also  further  ones  of  a 
general  character,  and  in  these  cases  the  service  may  be 
partly  supported  by  charges  or  fees  for  special  services, 
and  partly  out  of  the  common  funds. 

From  this  point  of  view,  it  is  pertinent  to  inquire 
whether  there  is  any  difference  between  transport  by 
canal  and  by  railroad  which  justifies  a  different  policy  of 
charges.  In  one  way  of  looking  at  it  there  is  no  such 
difference,  or  if  there  is  one,  it  is  of  opposite  nature  to 
the  one  we  are  looking  for.  The  general  benefits  of 
rapid  communication  of  intelligence  and  the  diffusion  of 
culture  and  of  social  solidarity  are  more  closely  associ- 
ated with  railroad  than  with  canal  services.  Probably 
the  benefits  of  canals  are  more  narrowly  limited  to  the 
mere  increase  in  value  of  the  goods  carried.  But,  on  the 
other  hand,  the  railroad  has  an  advantage  in  being  prac- 
tically able  to  adjust  its  charges  so  as  to  absorb  a  much 
larger  part  of  the  value  it  adds  to  the  goods  carried. 
The  canal  is  not  able  to  cut  into  consumers'  surplus  by 
its  system  of  charges  to  the  same  extent  as  is  the  rail- 
road, and  this  for  the  reason  that  the  principle  of  classi- 
fying traffic  according  to  what  it  will  bear  has  nothing 
like  the  scope  in  canals  that  it  has  on  a  railway.  There 
cannot  be  any  effective  value-classification  in  the  tolls 
charged  different  barges  for  the  use  of  the  waterway, 
while  competition  of  barge  operators  keeps  the  carrying 
charges  for  bulk  freight  also  near  a  level  fixed  by  the 
cost  of  handling,  and  without  much  variation  for  the 
value  of   the  particular  services. 

This  means  that  the  services  whose  utility  to  the 
consumers  is  greatest — those  which  would  bear  the 
highest  charge — need  pay  only  about   as   much  as  those 


gg]  THE  GENERAL  LEVEL  OF  CHARGES  gg 

which  are  barely  induced  to  move.  That  is,  if  the 
rates  are  put  low  enough  to  let  any  considerable 
volume  of  traffic  move,  the  "consumers'  rents"  are 
very  great.  But  the  railroad's  system  of  classification 
and  charging  what  the  traffic  will  bear  means  a 
cutting  into  these  high  "consumers'  rents "  right  and 
left,  and  an  absorbing  by  the  charges  of  a  far  larger 
fraction  of  all  the  special  utilities  it  creates.  So  that 
it  is  much  easier  for  a  railroad  to  pay  its  own  way 
without  cutting  down  too  much  the  use  that  is  made  of 
it.  This  furnishes  an  argument  for  selling  canal  trans- 
portation at  less  than  cost,  even  though  railroad  rates  be 
kept  up.  It  will  be  noticed  that  this  distinction  is  based 
on  the  tacit  assumption  that  the  canal  carries  a  varied 
traffic,  as  it  would  if  it  were  the  only  efficient  carrier  in 
the  district  it  served.  In  the  case  of  a  canal  which  com- 
petes with  or  supplements  a  railroad,  especially  if  there 
is  traffic  enough  for  both,  the  contention  of  this  para- 
graph fails  to  apply  with  the  same  force.  Where  there 
is  rivalry,  the  best  results  demand  that  the  charges  of 
both  carriers  should  be  governed  by  the  same  principles. 
But  to  return  to  the  question  at  issue:  that,  namely,  of 
how  much  should  be  charged  for  transportation  by  a  road 
run  purely  in  the  public  interest ;  it  would  appear  to  be 
in  order  to  investigate  the  total  of  benefits  conferred  on 
the  community  and  compare  these  with  the  cost  of  con-  \ 
ferring  them.  For  this  purpose  various  foreign  writers 
have  undertaken  the  somewhat  Protean  task  of  calculat- 
ing in  terms  of  money  the  total  net  economic  benefits  to 
the  community  of  the  freight  services  of  railways.  In 
one  case  this  is  done  by  the  simple  process  of  subtracting 
the  sum  total  of  what  the  community  pays  for  its  railway 
service  from  the  sum  total  it  would  have  to  pay  for  the 
same  services  if  performed  by  carts  on  the  common  high- 


lOO  LOCAL  FREIGHT  DISCRIMINATIONS  [loo 

roads.*  This  of  course  gives  a  fantastically  large  answer. 
A  more  moderate  and  reasoned  estimate  was  made  by 
Dr.  Wm.  Launhardt.''  He  applies  the  above  simple  pro- 
cess only  to  the  traffic  which  the  railroads  actually  took 
away  from  the  highroads.  On  the  new  traffic  called  into 
existence  by  the  railroads  themselves,  he  calculates  soci- 
ety's surplus,  or  the  consumers'  rents,  by  subtracting 
the  actual  charges  from  the  (estimated)  extreme  charges 
which  this  traffic  would,  intrinsically,  bear.  In  making 
this  estimate,  the  highest  charges  that  transportation  did 
bear  under  the  old  highway  system,  as  measured  by  the 
cost  of  cartage  for  the  longest  distances  to  which  these 
goods  were  ''  transportfdhig,''  are  taken  as  the  basis  for 
calculating  the  net  benefit  to  society  of  the  new  trans- 
portation called  into  existence  by  the  lower  charges  of 
the  railways.  By  the  former  and  simpler  calculation  the 
net  "benefits"  of  the  German  railways  footed  up  to  3.96 
times  the  total  freight  receipts  for  the  period  up  to  1878, 
or  twenty-five  per  cent  on  the  capital  of  the  roads.  The 
second  method  naturally  gives  a  much  smaller  result, 
even  though  Dr.  Launhardt  uses  as  a  subtrahend  the  cost 
of  producing  transportation  instead  of  the  gross  receipts, 
so  that  he  includes  the  road's  net  profits  (above  interest) 
in  the  total  of  economic  benefits.  His  result  is  only 
about  twenty-eight  per  cent  as  large  as  Engels'.  In 
either  case,  however,  the  conclusion  is  to  the  effect  that 
the  income  or  benefit  of  society  due  to  railways  is  vastly 
greater  than  the  income  of  the  railways  themselves,  for 
the  more  conservative  calculation  shows  a  clear  con- 
sumers' surplus  exceeding  in  amount  the  sum  total  of 
transportation  charges.     In  this  conclusion  everyone  will 

'Engel,  Zeiialter  des  Dampfes,  p.  156,  cited  in  Ulrich,  Eisenbahn- 
tarifwesen,  p.  142. 

*  Zentralblatt  der  Preussischen  Bahnverwaltung,  1883,  p.  27. 


lOi]      THE  GENERAL  LEVEL  OF  CHARGES  iqi 

probably  agree,  although  the  process  on  which  it  is  based 
is  in  this  instance  crude  and  seems  to  the  writer  falla- 
cious. As  a  means  of  finding  the  total  increase  of  pro- 
ducers' and  consumers'  surplus  due  immediately  to  goods 
carried  and  embodied  in  them  alone,  both  processes  give 
too  high  an  answer/^  However,  these  calculations  deal 
with  only  a  part  of  the  social  surplus  due  to  railways, 
with  that  part  embodied  as  added  utility  in  the  goods 
actually  transported.  But  a  very  large  part  of  the  bene- 
fits of  railways  takes  the  shape  of  increased  values  of 
land  and  of  more  permanent  kinds  of  improvements, 
while  as  for  the  general  national  and  social  benefits  re- 
sulting from  the  more  perfect  unification  of  peoples  and 
races  into  a  solid  economic  organism,  and  the  whole 
civilizing  influence  of  cheap  transportation  of  goods, 
these,  though  great,  can  hardly  be  measured  at  all.  We 
can  then  readily  agree  that  the  income  of  society  due  to 
railroads  is  greater  than  that  of  the  roads  themselves, 
and  that  on  the  average  shipment  the  total  of  the  com- 
munity's gains  far  exceeds  the  price  paid.     This  points 

^  Engel  assumes  that  the  benefit  from  newly  created  traffic  can  be 
expressed  as  follows: 

Let  V  equal  the  volume  of  newly  created  traffic. 

Let  A  equal  gross  earnings  of  such  traffic. 

Let  B  equal  highest  charges  per  unit  of  freight  formerly  collected  for 
cartage. 

Then;  Net  Benefit  =  V  B  —  A. 

This  involves  the  error  of  assuming  that  the  total  utility  of  a  sum  of 
services  is  equal  to  the  product  of  the  number  of  units  by  the  greatest 
utility  of  any  single  one, — the  utility  of  the  service  to  the  man  who 
wants  it  most.  We  are  considering  units  of  traffic  which  would  not 
move  at  the  rate  B — hence  their  utility  was  not  B,  but  something  less. 
In  fact  it  ranged  all  the  way  from  B  down  to  the  level  of  the  actual 
rates  collected  by  the  road.  Thus  the  total  utility  of  the  railways' 
transportation  services,  as  far  as  it  is  embodied  in  the  goods  carried,  is 
magnified,  and  that  part  of  society's  surplus  is  accordingly  over- 
estimated. 


102  LOCAL  FREIGHT  DISCRIMINATIONS  [102 

in  the  direction  of  a  policy  of  enriching-  the  consumers 
of  transportation  at  the  expense  of  the  producers,  in  the 
expectation  of  largely  increasing  traffic  and  so  giving 
society  a  net  benefit  far  greater  than  the  financial  loss  to 
the  railroad  administration.  This  loss  could  then  be 
made  good  by  taxation  and  society  still  be  the  gainer  by 
a  substantial  amount.  This  is,  of  course,  identically  the 
same  principle  that  governs  in  the  case  of  highways, 
bridges,  etc.,  and  is  there  carried  to  its  logical  conclu- 
sion of  free  service. 

However,  in  attacking  the  problem  concretely,  the 
exact  calculation  of  past  benefits,  even  if  it  could  be 
made,  would  not  be  conclusive  evidence.  For  the  ques- 
tion is  one  of  benefits  to  be  secured  at  present,  by  a 
policy  which  will  change  the  existing  volume  of  traffic 
and  earnings,  and  the  only  things  that  need  measuring 
are  the  benefits  and  costs  of  that  particular  change.  We 
are  measuring  changes  at  the  margin  of  things  as  they 
are  now,  and  the  measurement  must  be  a  marginal  one 
and  not  an  historical  sum  total  or  an  average.  To  put 
it  algebraically,  it  is  not  the  proportion  of  X  to  Y  that 
is  wanted,  but  of  A  X  to  A  Y. 

Dr.  Launhardt  has  presented  this  argument  in  very 
exact  form.'  What  is  the  result  of  a  decrease  of  rates  ? 
As  regards  the  traffic  carried  already,  the  only  effect  is 
to  transfer  wealth  from  the  carrier  to  the  shipper  or  to 
the  final  consumer.  But  the  decrease  will  be  bound  to 
call  forth  some  new  traffic  also.  On  this  traffic,  down 
to  the  point  where  it  pays  only  its  prime  cost,  the  road 
makes  a  profit,  while  the  shippers  or  consumers  also  re- 
ceive some  surplus.     The  total  wealth  of  society,  con- 

'  Launhardt,   Theorie  der  Tarifbildung,  passim.     See  also  criticism 
in  Archiv  fur  Eisenbahnwesen ,  1892,  pp.  10  et  seq. 


103]      THE  GENERAL  LEVEL  OF  CHARGES  103 

sumers  and  producers  together,  is  increased,  then,  by 
lowering  rates  down  to  the  point  where  they  cover  only 
prime  cost.  To  use  this  argument,  however,  as  support- 
ing a  policy  of  running  railways  which  earn  only  bare 
operating  expenses,  and  canals  that  pay  no  interest  on 
their  first  cost,  is  to  run  against  several  objections,  some 
of  principle  and  some  of  expediency. 

First  there  is  the  practical  difficulty  of  making  a  tariff 
based  on  operating  costs.  Any  simple  scheme,  such  as 
Launhardt  proposes  in  the  form  of  a  distance  tariff  based 
on  the  average  cost,  would  be  bound  to  vary  consider- 
ably from  the  facts  in  innumerable  cases.'  Such  mistakes 
would  in  one  way  be  worse  than  any  that  are  made  now, 
for  they  would  result  in  carrying  much  traffic  at  an 
actual  loss,  instead  of  merely  at  an  unusualy  small  operat- 
ing profit.  A  critic  might  also  be  compelled  to  doubt 
Dr.  Launhardt's  estimate  that  the  then  existing  traffic 
could  have  been  increased  fifty  per  cent  by  the  proposed 
policy.'  The  chief  practical  objection  recognized  by  the 
author  of  the  theory  is  the  difficulty  of  raising  large 
funds  by  taxation.  Dr.  Launhardt  admits  that  this  re- 
verses the  whole  result  of  his  argument.  The  plan  would 
mean  easing  a  burden  that  is  comparatively  little  felt  and 
increasing  one  that  is  felt  much  more  heavily.  So  that 
even  if  the  change  increased  the  wealth  of  the  com- 
munity, it  would  still  be  feli  as  an  added  burden.  When 
one  considers  the  recent  dissatisfaction  with  the  finan- 
cial situation  in  Germany,  one  cannot  but  conclude  that 
for  Prussia  to  renounce  the  comfortable  earnings  of  the 
state  railways  and  seek  for  some  form  of  taxation  to 
make  good  the  difference,  would  probably  from  the  fis- 

'  E.  Offenberg,  Archiv  fur  Eisenbahnwesen,  1892,  pp.  11-12. 
*  Ibid.,  pp.  13-14. 


I04  LOCAL  FREIGHT  DISCRIMINATIONS  [104 

cal  point  of  view  have  all  the  aspects  of  a  national 
calamity. 

Of  course  there  would  be  one  easy  way  out  of  the  dif- 
ficulty. The  tax  could  be  made  indirect,  and  the  base 
chosen  could  be  the  buying  of  transportation.  This 
would  be  by  far  the  most  convenient  and  least  disturbing 
method  to  follow,  with  the  single  drawback  that  it  would 
mean  abandoning  the  whole  object  sought,  and  arriving 
back  at  the  identical  system  on  which  we  are  seeking  to 
improve.  Indeed  for  many  purposes  the  most  illumina- 
ting way  of  regarding  rates  is  the  following,  namely,  to 
consider  that  each  charge  is  made  up  of  two  parts,  a 
price  and  a  tax  or  special  assessment.  The  first  part 
covers  all  costs  that  can  be  in  any  way  traced  to  the 
traffic  in  question,  and  would  be  by  no  means  insignifi- 
cant. The  second  part  is  a  contribution  toward  the  truly 
"  general  "  expenses,  and  can  very  profitably  be  regarded 
as  nothing  more  nor  less  than  a  phase  of  indirect  taxa- 
tion for  a  public  purpose. 

But  further  than  all  this,  there  is  a  more  fundamental 
objection  to  any  scheme  of  selling  transportation  at  less 
than  cost.  The  whole  argument  of  the  case  rests  on  the 
assumption  of  an  existing  plant  capable  of  taking  care  of 
the  extra  traffic  without  any  additions,  and  the  lowering 
of  rates  to  the  level  of  the  operating  expenses  would  be 
limited  by  the  condition  that  the  traffic  thus  called  forth 
does  not  exceed  the  capacity  of  the  existing  plant  to 
handle,  At  that  point,  even  in  Launhardt's  argument, 
all  further  increase  of  traffic  would  have  to  be  stopped, 
by  raising  the  rates,  until  such  time  as  it  would  pay  the 
whole  cost  of  installing  aud  operating  such  new  plant 
as  might  be  necessary.  It  is  one  thing  to  lower  rates 
in  order  to  use  to  advantage  the  extra  capacity  of  an  ex- 
isting plant;    it  is   quite  another    thing,  even  from  the 


105]      THE  GENERAL  LEVEL  OF  CHARGES  105 

social  point  of  view,  to  sink  new  capital  in  a  commercial 
enterprise,  knowing  that  it  can  never  earn  interest. 

One  more  weakness  remains  to  be  pointed  out  in  the 
philosophy  of  selling  transportation  at  less  than  cost.  If 
the  arguments  used  were  applied  in  exactly  the  same  way 
to  other  businesses  they  would  be  found  to  give  substan- 
tially the  same  results,  and  here  in  the  last  analysis  is  the  \ 
reductio  ad  absurduni  of  the  whole  process.  One  may 
venture  to  assert  that  the  total  economic  benefits  of  most 
modern  machine  industries,  as  compared  to  the  hand 
processes  they  displaced,  would  prove  to  exceed  the 
present  cost  of  production  by  quite  as  satisfactory  a  per- 
centage as  was  shown  in  the  case  of  railways.  Cotton 
gins  or  harvesters  no  less  than  railways  could  be  shown 
to  be  worth  far  more  than  they  cost,  and  hence  deserv- 
ing of  the  same  kind  of  treatment.  The  same  argument 
which  Dr.  Launhardt  applies  to  increments  of  railway 
traffic  could  be  applied  to  any  industry  needing  large 
fixed  plants,  provided  always  there  were  some  unused 
capacity  in  the  plants  as  they  stood.  Shoes  or  cotton 
goods  could  just  as  well  be  sold  at  prices  which  would 
merely  cover  the  special  cost  of  the  extra  output  that 
would  be  demanded,  and  the  net  economic  benefit  to 
society  could  be  just  as  clearly  shown. 

The  question  then  comes  down  to  one  that  cannot  be 
answered  exactly  in  the  existing  state  of  human  knowl- 
edge;  namely,  to  the  question  whether  the  ''general" 
benefits  of  railways  are  enough  greater  than  those  of 
other  industries  to  warrant  any  markedly  different  treat- 
ment. To  this  question,  common  sense  gives  a  fairly 
clear  answer,  if  we  can  judge  by  the  policies  actually  fol- 
lowed. If  the  road  is  the  first  one  in  a  section,  a  pioneer 
developing  agent,  the  general  benefits  come  in  the  form 
of  very  greatly  increased  values,  and  the  building-up  of 


I06  LOCAL  FREIGHT  DISCRIMINATIONS  [io6 

a  truly  specialized  industrial  system  where  nothing  but 
scattered  and  self-sufficing  communities  existed,  or  the 
making  possible  of  settlement  where  none  existed  at  all ; 
in  a  word,  the  industrial  annexation  of  new  territory, 
the  extending  of  the  social  and  economic  frontier, 
j  These  ends  are  important  out  of  proportion  to  the  special 
values  of  the  special  services,  and  justify  the  selling  of 
transportation  at  less  than  cost.  And  in  such  a  case, 
natural  forces  nearly  always  see  to  it  that  for  a  consider- 
able time  transportation  will  be  sold  at  less  than  cost. 

But  where  a  section  is  already  industrially  annexed, 
the  conditions  are  different.  The  extension  or  improve- 
ment of  existing  railway  facilities  produces  many  general 
benefits,  but  so  also  does  the  establishment  of  any  new 
industry.  Any  such  industrial  happening  means  an  in- 
crease of  land  values,  and  a  general  increase  of  values  in 
all  businesses  engaged  in  supplying  either  the  material 
wants  of  the  new  industry  itself  or  the  needs  of  the  in- 
creased population  which  it  tends  to  attract.  Thus  there 
are  no  marked  differences,  once  a  section  has  been  even 
passably  supplied  with  railway  facilities,  between  putting 
new  money  into  mills,  or  farm  improvements,  and  putting 
it  into  more  railway  equipments.  Hence  it  would  be 
uneconomical  to  cause  capital  invested  in  railways  to  earn 
markedly  less  than  that  invested  in  other  enterprises,  en- 
tirely aside  from  the  financial  problem  of  making  good 
the  deficit. 

To  sum  up,  then,  certain  arguments  have  been  brought 
forward  tending  to  show  that  the  general  economic 
benefits  of  railroads  could  be  increased  by  selling  trans- 
portation as  a  whole  at  less  than  cost.  But  on  closer 
examination  these  were  found  to  present  practical  diffi- 
culties, and  to  fail  fundamentally  to  make  good  their 
case.     The  general  benefits  of  railways  (connected  with 


107'      -^^^  GENERAL  LEVEL  OF  CHARGES  107 

the  freight  service)  may  be  greater  in  proportion  to  the 
"special"  benefits  than  is  the  case  in  other  industries, 
and  this  would  of  itself  justify  selling  at  less  than  cost. 
But  in  the  first  place,  this  difference  is  not  measurable, 
nor  is  it  very  great,  except  in  the  case  of  the  first  line 
tapping  a  new  country,  and  in  that  case  transportation 
usually  must  perforce  be  sold  at  less  than  cost  for  some 
time.  In  the  second  place,  to  make  good  any  deficit 
which  public  policy  might  impose  there  is  no  more  just 
or  suitable  means  than  the  quasi-taxation  involved  in  the 
existing  systems  of  "charging  what  the  traffic  will  bear," 
provided  this  is  administered  as  tax  systems  should  be, 
wisely  and  for  the  public  good. 


CHAPTER  VII 

IDEAL  OR  "natural"  SYSTEMS  OF  RELATIVE  RATES 

Various  "natural"  systems  of  railway  charges  have 
been  developed  and  even  experimented  with,  and  the 
practicability  of  such  a  system  is  well  worth  study.  The 
principle  which  underlies  them  is  the  one  already  men- 
tioned as  the  principle  of  comparative  cost,  and  it  may 
I  be  remarked  in  starting  that  it  is  essentially  a  static  idea, 
and  one  which  underlies  the  whole  competitive  system 
of  industry.  As  the  law  is  so  fundamental  it  may  prove 
profitable  to  isolate  it  and  trace  it,  singly,  to  its  ultimate 
outcome,  in  order  to  see  wh-ether  a  system  of  rates  can 
possibly  be  built  on  this  alone.  Should  this  prove  pos- 
sible, we  would  have  secured,  barring  dynamic  disturb- 
ances and  friction,  the  system  which  secures  at  once  the 
most  efificient  production  and  most  just  distribution  of 
wealth.  The  line  of  argument  in  developing  the  idea  of 
a  "natural"  system  is  something  like  the  following: 

In  order  that  society  shall  serve  itself  most  ef^ciently, 

shall  get  the  most  wealth  for  the  least  effort,  it  must 

j  buy  each  commodity  from  the  man  who  produces  and 

delivers  it  at  the  lowest  total  cost.     To  secure  this  result, 

each  producer  must  get  the  full   benefit  of  his  abilities 

a7id  natural  advantages.     Now,  arbitrary  discrimination 

in  railroad  rates  may  prevent  that  thing ;  it  may  enable 

one  man  to  sell  cheaper  than  his  rival  although  his  goods 

actually  cost  society  more  in  labor  and   interest  than  do 

those  of  the  other  man.     For  instance,  suppose  two  mills 

each  one  hundred  miles  from  a  market  for  which  they 
io8  [io8 


109]  IDEAL  SYSTEMS  OF  RELATIVE  RATES  109 

are  competing.  Say,  mill  A  is  the  less  efficient,  its  goods 
cost  more  to  make,  but  for  some  reason  it  has  gotten  a 
special  rate  from  the  railroad.  If  the  rate  is  low  enough, 
mill  A  can  undersell  mill  B  and  take  the  market.  Just 
what  does  this  mean?  Presumably  the  two  hauls  of 
equal  length  would  cost  the  railroads  equal  amounts. 
Then  the  goods  from  the  mill  B,  delivered  at  the  market 
town,  have  cost  society  less  than  those  from  mill  A 
which  the  market  patronizes.  Society  is  poorer  because 
a  less  efficient  agent  does  some  of  its  work  which  a  more 
efficient  one  stood  ready  to  do,  and  the  producers  at  mill 
B  have  virtually  been  deprived  of  part  of  their  product, 
which  was  handed  over  to  mill  A. 

This  is  one  line  of  argument  which  underlies  current 
ideas  of  what  constitute  "  reasonable  "  rates.  They  are 
those  rates  under  which  no  producer,  actual  or  potential, 
competing  for  the  right  to  serve  society,  shall  be  put  at  I 
an  undue  advantage  or  disadvantage  from  the  above 
point  of  view  with  respect  to  any  and  all  other  producers. 
This  is  little  more  than  a  premise,  a  point  of  departure, 
a  line  of  attack;  but  at  least  it  is  a  logical  one, — '' vom 
gemeinwirthschaftlichen  Staiidpunktey  Following  this 
premise,  if  any  want  of  society  or  any  of  its  members  can 
be  satisfied  in  alternate  ways,  one  or  both  of  which  in- 
volve transportation  services,  then  the  charges  for  such 
services  should  be  such  that  the  means  of  satisfying  the 
consumer's  want  whose  money  expense  to  him  is  the  less 
shall  be  also  the  means  whose  true  cost  is  less.  This 
could  be  done  if  every  charge  could  be  made  equal  to  the 
cost  of  the  services  involved,  but  it  does  not  require  such 
an  absolute  cost-system.  What  is  required  is  that  the 
charges  for  all  transportation  services  which  compete 
with  each  other  should  be  so  adjusted  that  differences  in 
charge  shall  equal  differences  in  the  assignable  cost  of 


no  LOCAL  FREIGHT  DISCRIMINATIONS  [no 

carriage.  Incidentally,  there  should  logically  be  no  break 
of  continuity  in  passing  to  the  limiting  case  in  which  the 
distance  and  cost  of  transportation  involved  are  zero,  in 
other  words,  the  case  in  which  the  goods  do  not  use  the 
railroad  at  all.  Each  freight-service  is  a  part  of  a  pro- 
I  cess  of  production,  which  competes  with  other  processes 
'  for  the  right  to  supply  society  with  a  particular  thing, — 
let  us  say  furniture.  Thus  the  routes  by  which  the  rival 
products  can  reach  common  markets  are  in  fairly  direct 
competition  with  each  other.  Not  only  this,  but  all  the 
separate  carrying  services  involved  in  getting  raw  mate- 
rials to  the  factories,  in  moving  all  the  auxiliary  capital 
goods  necessary,  and  in  moving  the  raw  material  of  those 
capital  goods  themselves,  and  so  on  in  a  practically  end- 
less chain  ; — all  these  various  services  are  competing  with 
each  other  in  a  real  sense  when  John  Smith's  order  for 
furniture  is  sent  to  the  factory  offering  the  lowest  price. 
Ideal  perfection  then  requires  that  in  every  case  w^here  an 
identical  want  can  be  satisfied  in  more  than  one  way,  the 
intricate  systems  of  carrying  services  involved  in  the  rival 
processes  should  be  loaded  each  with  the  same  contri- 
bution to  the  general  expenses,  irrespective  of  distance, 
for  only  in  this  way  can  the  comparative-cost  idea  be 
fully  carried  out. 

One  theoretical  complication  had  best  be  ruled  out  at 
the  start,  because  the  problem  is  already  intricate  enough. 
To  a  certain  extent  the  furniture-maker  and  the  rug- 
maker,  the  butcher,  baker  and  candlestick-maker,  are  all 
I  competing  for  the  patronage  of  John  Smith's  marginal 
I  dollars,  so  that  to  make  sure  that  those  dollars  are  best 
spent,  the  comparative-cost  principle  would  have  to  be 
applied  to  everything  John  Smith  consumes,  that  is,  uni- 
versally. But  this  must  be  thrown  out  of  court.  In  the 
first  place,  it  means  the  introduction  of  the  Launhardtian 


Ill]  IDEAL  SYSTEMS  OF  RELATIVE  RATES  m 

system,  which  was  discussed  in  the  preceding  chapter, 
and  dismissed  as  impracticable,  and  in  the  second  place, 
such  "  competition "  between  John  Smith's  particular 
wants  for  satisfaction,  taking  place  within  the  mind  of 
John  Smith,  is  so  largely  governed  by  his  particular  per- 
sonal tastes,  fads  and  habits,  and  so  little  by  any  slight 
variations  in  the  cost  of  satisfying  different  wants,  that 
the  cost  element  can  fairly  be  left  out  of  account  in  con- 
sidering it.  A  slight  difference  in  price  may  settle  which 
of  two  brands  of  automobile  John  Smith  will  buy,  but  it 
is  not  likely  to  decide  whether  he  buys  an  auto,  a  sailing- 
yacht  or  a  motor-boat,  and  a  slight  shift  in  the  classifi- 
cation of  meat  and  vegetable  food-products  would  hardly 
make  much  impression  on  his  particular  carnivorous, 
vegetarian,  or  Fletcheristic  habits  of  diet.  Mr.  L.  E. 
McPherson  has  presented  very  forcibly  the  insignificance 
of  single  freight  rates  in  settling  a  consumer's  choices 
between  different  goods.'  But  in  settling  the  combats 
of  rival  producers  in  the  same  line  small  differences  be- 
come decisive.  Insignificant  as  compared  with  total 
prices,  they  loom  large  against  the  margin  of  profit  on 
the  turnover.  So  we  may  confine  ourselves  to  the  prob- 
lem in  which  a  nice  adjustment  counts  and  let  the  other 
settle  itself. 

Even  from  the  point  of  view  of  equalizing  the  situa- 
tions of  strictly  competing  producers,  however,  the  only 
system  that  will  be  perfect  is  practically  that  of  Dr.  Laun- 
hardt,  or  one  which  would  charge  for  each  unit  of  traffic 
only  the  special  cost  of  carrying  it.  Any  other  system 
would  break  at  some  point  the  rule  of  comparative  cost. 
We  may,  if  we  like,  construct  an  imaginary  system  which 

'McPherson,  Railroad  Freight  Rates,  chap.  vi.  Mr.  McPherson, 
however,  fails  to  compare  the  selling  price  of  any  commodity  with  the 
sum  total  of  transportation  charges  that  have  to  be  debited  against  it. 


112  LOCAL  FREIGHT  DISCRIMINATIONS  [112 

should  carry  out  this  idea.  In  order  to  raise  fixed 
charges  and  other  general  expenses  a  tax  could  be  added 
to  the  freight-rate,  a  tax  which  should  not  vary  with  dis- 
tance, though  it  would  vary  with  the  value  of  the  goods. 
This  would  have  to  be  supplemented  by  an  equal  tax  on 
goods  sold  in  places  which  have  access  to  railway  car- 
riage, but  which  goods  have  not  been  carried  on  a  rail- 
way. This  would  be  necessary  to  preserve  the  logical 
continuity  of  the  cost-difference  system  of  rates.  If  it 
were  not  done  the  short-distance  traffic  would  be  killed, 
and  an  undue  number  of  producers  v>-ould  arise,  each 
supplying  his  own  town,  and  protected  by  the  high  fixed 
tax  from  the  competition  of  somewhat  more  eiificient 
producers  in  his  more  or  less  immediate  neighborhood. 
It  may  seem  strange  that  such  men  should  be  taxed  for 
railroad  services  which  they  do  not  get,  but,  after  all, 
they  are  not  injured  with  respect  to  others,  for  all,  apart 
from  and  above  the  cost  of  any  railroad  service  they  get, 
pay  the  same  tax.  Only,  if  one  of  them  is  not  that  most 
efficient  producer  who  should  supply  his  home  market, 
the  fact  will  be  ascertained  and  the  article  will  be  sup- 
plied by  some  more  efficient  man  who  was  previously 
debarred  by  railway  charges  which  were  uneconomically 
apportioned.  Of  course  such  a  scheme,  like  that  of  Herr 
Launhardt,  presupposes  unlimited  governmental  control, 
and  is  fantastically  unlike  anything  we  are  likely  to  see, 
but  it  is  the  logical  result  of  the  application  of  an  eco- 
nomic principle,  and  it  may  be  suggestive  to  examine  it 
more  closely. 

The  tax  would  be  apportioned  to  different  goods  on 
the  general  principle  of  classification.  There  are,  how- 
ever, different  goods  so  related  to  each  other  that  they 
do  compete  with  each  other  for  railway  carriage  in  a 
very  real  sense.     Such  are  raw  materials  and  the  finished 


113]  IDEAL  SYSTEMS  OF  RELATIVE  RATES  113 

goods  made  from  them.  The  location  of  a  mill  often 
depends  on  the  relative  charges  for  the  raw  materials. 
If  the  charge  on  the  raw  material  is  unduly  low,  then  the 
mill  will  be  located  with  reference  to  being  near  its  cus- 
tomers, and  probably  farther  from  its  supplies  of  raw 
materials  and  of  coal,  (which  for  this  purpose  is  analo- 
gous), than  is  economical  for  society.  If  for  any  strange 
reason  the  charge  on  the  raw  materials  is  higher  than 
that  on  the  product  made  from  them,  the  mill  will  be 
located  too  near  the  sources  of  supply  and  too  far  from 
the  customers  to  secure  the  most  economical  results  as 
regards  the  true  cost  of  the  total  process  of  production. 
It  will  probably  be  impossible  to  apply  any  definite  rule 
to  govern  such  cases,  since  they  are  so  complicated  and 
inter-combined.  Steel,  lumber,  leather,  etc.,  are  raw 
materials  for  the  manufacture  of  so  many  different  kinds 
and  qualities  of  manufacture  that  no  adjustment  is  pos- 
sible that  will  meet  the  perfection-test  for  all  of  them  at 
once.  In  many  cases  there  come  into  the  figuring  rates 
on  so  many  complementary  raw  materials,  as  well  as  on 
several  different  finished  products,  that  any  application 
of  the  comparative-cost  rule  is  hopeless.  In  general,  the 
actual  practice  of  placing  manufactured  goods  in  higher 
classes  than  raw  materials  may  be  said  to  have  a  slight 
tendency  to  locate  factories  nearer  the  market  and  farther 
from  the  sources  of  raw  materials  than  is  economically 
desirable.  '  But  in  the  simplest  cases  raw  materials 
should  bear  the  same  tax  over  cost  of  carriage  as  the 
products  made  from  them ;  a  bushel  of  wheat  and  the 
flour  normally  made  from  it,  or  live-stock  and  the  cor- 

'  This  might  not  hold  true  in  cases  where  the  raw  material  was  much 
greater  in  bulk  than  the  product  into  which  it  was  made.  Moreover, 
most  raw  materials  are  cheaper  to  handle  than  finished  products,  and 
so  must  be  placed  in  somewhat  lower  classes  to  fulfil  the  law  of  "  com- 
parative cost." 


114  LOCAL  FREIGHT  DISCRIMINATIONS  [114 

responding  dressed  meat,  should  bear  the  same  fixed 
loading  for  profit  over  and  above  the  cost  of  carriage. 

What  would  be  the  eiifect  of  such  a  system  as  is  here 
outlined  on  the  railway  business?  If  rates  (including 
the  "  tax  ")  were  set  at  the  average  level  at  which  they 
now  are,  there  would  still  be  a  large  increase  in  the 
effective  demand  for  transportation.'  Railroads  with 
capacity  to  spare  would  be  more  freely  made  use  of;  and 
on  these  lines  natural  advantages  would  be  more  import- 
ant than  now,  and  location  less  so,  in  determining  the 
local  distribution  of  industry.  We  may  note  that  this 
tendency  is  claimed  by  railroad  men  to  be  one  of  the 
great  points  of  superiority  in  present  methods  of  rate- 
making.  The  proposed  scheme  would  accomplish  the 
desired  result  consistently,  systematically  and  to  a  greater 
degree  than  the  present  system. 

Another  effect  would  be  that  roads  would  be  worked 
more  nearly  up  to  their  full  capacity  than  they  are  now, 
in  an  average  year,  and  those  whose  capacity  is  now  well 
used  would  become  greatly  congested.  This  would 
mean  a  general  increase  in  the  variable  costs  of  carriage,'' 
and  a  corresponding  increase  in  rates,  tending  to  check 
the  growth  of  traffic.  But  the  profits  of  the  roads  would 
have  largely  increased.  This  under  government  control 
would  not  be  permanently  allowed,  and  the  tax  levied  to 
pay  fixed  charges  would  be  reduced.  This  would  have 
only  a  slight  tendency  to  increase  traffic,  as  it  would 
apply  to  all  production  whether  with  or  without  the  use 
of  railroad  transportation.  Thus  we  should  have  traffic 
increasing,  special  costs  increasing  and  general  costs 
diminishing.  This  process  would  culminate  with  any 
road  if  it  reached  the  full  capacity  of  its  track,  when  the 

*Due  to  the  peculiar  burden  of  the  excise  on  non-shipping  producers. 
'See  supra,  pp. 


115]  IDEAL  SYSTEMS  OF  RELATIVE  RATES  115 

cost   specifically  traceable    to    any  further   traffic   taken  \ 
would  include  interest    on    the  cost  of   the   increase  of 
plant  necessary  to  handle  it. ' 

At  this  point  a  curious  dilemma  presents  itself.  Traffic 
cannot  be  allowed  to  keep  on  growing,  because  new 
traffic  will  cost  more  than  it  brings  in,  and  it  is  contrary 
to  the  theory  assumed  as  the  basis  of  this  policy  to  take 
on  any  traffic  for  less  than  the  cost  traceable  to  it.  But 
the  only  way  to  prevent  traffic  from  growing  so  as  to 
demand  the  investment  of  more  capital  is  to  raise  the 
transportation-charges  (at  the  same  time  lowering  the 
amount  of  the  quasi-tax  charge).  That  is,  the  principle 
of  making  the  rate-differentials  equal  to  differences  in 
traceable  costs  would  be  abandoned  and  the  rates  be 
loaded  with  a  charge  toward  strictly  general  expenses. 
As  the  natural  demand  for  transportation  increased  in 
strength,  the  rate  would  have  to  be  still  further  raised, 
until  at  the  point  where  the  demand  was  so  strong  that 
new  traffic  could  be  made  to  pay,  within  reasonable 
time,  for  the  plant  necessary  to  move  it,  the  existing 
traffic  would  be  paying  its  full  cost  in  the  rates  and  the 
fantastic  quasi-tax  would  have  dropped  out  of  the  sys- 
tem as  no  longer  needed.  But  by  the  same  token  the 
naturalness  of  the  system,  from  the  standpoint  originally 
taken,  has  been  destroyed  by  the  apportionment  of  gen- 
eral expenses  among  separate  units  of  traffic. 

Seeing  that  this  process  of  apportionment  is  something 
which  even  an  imaginary  "natural"  system  cannot  escape, 
it  follows  that  there  can  be  no  "natural"  system  of  rates 
unless  there  is  some  "natural"  method  of  apportionment. 
That  there  is  no  such  method  which  will  answer  the 
strict  demands  of   the  standard  of   comparative  special 

'  For  treatment  of  the  results  of   this  general  situation    see  Clark, 
Essentials  of  Economic  Theory,  pp.  423-4. 


Il6  LOCAL  FREIGHT  DISCRIMINATIONS  [ii6 

costs  can  be  easily  shown.  Let  us  suppose  the  general 
expenses  to  be  apportioned  among  hauls  of  different  dis- 
tances according  to  the  special  costs,  so  that  each  rate 
on  a  given  article  would  be  a  fixed  percentage,  say,  200 
per  cent  more  than  the  special  cost  of  the  carriage  in- 
volved. Then  as  between  a  producer  who  ships  a  long 
distance  and  his  competitor  who  ships  a  short  distance, 
the  former  will  be  at  a  greater  disadvantage  in  transpor- 
tation charges  than  the  difference  in  measurable  costs 
warrants.  Or  if  each  article  paid  a  fixed  assessment 
toward  general  expenses  regardless  of  distance,  then  as 
between  a  man  who  ships  a  short  distance  and  one  who 
does  not  have  to  ship  at  all,  the  former  is  clearly  preju- 
diced in  a  most  unjust  and  uneconomical  way.  The  at- 
tempt to  square  any  system  absolutely  with  this  stand- 
ard seems  then  hopeless,  and  the  "natural"  method  of 
apportioning  joint  costs,  if  there  be  one,  would  seem  to 
be  thrown  back  upon  some  less  exacting  and  more  prac- 
tical test  of  justice  or  social  utility. 

But  here  comes  to  the  rescue  the  principle,  already 
discussed,'  by  which  the  "  special "  cost  of  large  units 
of  traffic  properly  includes  an  apportioned  share  of  much 
of  the  "  general  "  expense.  The  disturbing  element  is 
the  large  amount  of  untraceable  expenses.  Now  if  one 
takes  single  shipments  as  units,  this  elusive  element 
would  far  outweigh  the  traceable  expenses,  and  the  dif- 
ference between  total  outlay  and  the  sum  of  the  special 
costs  is  tremendous.  But  if  larger  units  be  taken,  as 
would  in  practice  be  the  case  if  the  road  were  debating 
the  readjustment  of  its  local  scales  for,  say,  all  its  short- 
distance  traffic,  then  it  is  economically  correct  to  include 
many  more  items.  If  the  traffic  be  divided  into  such 
large  units,  the  sum  of   the  traceable  costs  will  much 

'  See  latter  part  of  chap.  i. 


117]  iDEAL  SYSTEMS  OF  RELATIVE  RATES  ny 

more  nearly  equal  the  sum  total  of  outlays,  and  the  dis- 
turbing element  of  untraced  expenses  would  diminish. 

Now  what  is  being  considered  in  this  case  is  for  the 
most  part  just  such  /ar£-e  units  of  trafific.  The  classifi- 
cation has  already  been  made  and  the  relation  the  classes 
should  bear  to  each  other  settled.  Moreover,  the  fullest 
cost-statistics  must  have  been  obtained.  What  is  now 
at  issue  is  a  classification  by  distance,  so  that  the  unit 
considered  is,  say,  all  the  road's  third-class  shipments  of 
seventy  miles  or  thereabouts,  which  are  being  compared 
with  the  forty-mile  and  the  one-hundred-and-fifty-mile 
shipments,  to  see  what  loading  for  general  expenses  each 
should  bear,  as  compared  to  the  others.  These  units  of 
traffic  are  fairly  large,  and  so  could  correctly  be  charged 
with  their  share  of  many  expenses  which  could  in  no 
sense  be  traced  as  "special"  to  single  shipments.  For 
instance,  some  part  of  the  capital  charges,  represented 
by  investments  in  motive  power  and  rolling  stock,  might 
well  be  traced  to  such  a  large  ton-mileage  movement  as 
is  here  considered,  so  that  the  vitiating  element  of  un- 
traceable costs  is  far  sm.aller  than  one  would  suppose, 
but  it  is  still  large.  Remains  therefore  the  problem  of  a 
"  natural "  rule  for  apportioning  expenses  that  are  hope- 
lessly general. 

The  answer  to  this  question  can  probably  best  be  seen 
by  imagining  a  state  railroad  which  wishes  to  try  the 
peculiar  policy  outlined  in  the  earlier  part  of  this  chapter, 
but  finds  that  to  do  so  means  the  development  of  more 
traffic  than  it  can  handle.  Such  a  road  must  needs  seek 
two  things,  namely,  the  full  use  of  its  plant  short  of  con- 
gestion, and  the  least  possible  violation  of  the  cost- 
difference  principle  of  relative  justice  on  which  the  whole 
system  is  based.  Aside  from  these  general  principles,  it 
would  be  governed  by  various,  and  perhaps  conflicting, 
considerations  of  public  policy. 


CHAPTER  VIII 

REASONABLENESS    IN    DECISIONS  OF    THE    COURTS    AND  OF 
THE    INTERSTATE    COMMERCE    COMMISSION 

In  analyzing  standards  of  reasonableness  perhaps  the 
most  important  are  those  contained  in  the  decisions  of 
the  commissions  and  courts,  but  they  are  not  easy  to 
formulate  into  a  consistent  scheme,  especially  as  some  of 
the  factors  affecting  reasonableness  are  admittedly  con- 
flicting.' In  the  following  treatment  some  attempt  will 
be  made  to  generalize  the  standards  set  up,  and,  if  possi- 
ble, to  estimate  their  relative  importance  and  validity  in 
different  classes  of  cases.  In  doing  this  we  may  first 
take  up  the  interpretations  of  the  common  law,  limiting 
ourselves  as  closely  as  possible  to  the  question  of  single 
rates  in  their  relations  to  each  other.  However,  the 
rules  for  determining  whether  a  rate  is  reasonable  "  in 
and  of  itself "  cannot  be  omitted,  for  the  reason  that, 
after  all,  the  above  phrase  simply  means  "  in  its  broader 
relations."  It  means  a  rate  on  a  given  item  of  traffic 
which  loads  that  item  with  a  "reasonable"  share  of  the 
total  costs,  as  compared  of  course  with  the  sum  total  of 
all  other  items  of  trafific'  Thus  it  states  a  problem  of 
the  same  sort,  though  far  more  complicated,  than  that 
of  determining  if  a  rate  is  reasonable  as  compared  to 
certain  other  specific  rates.     More  things   have   to   be 

'  Beale  &  Wyman,  Railroad  Rate  Regulation,  p.  312. 

^Ibid.,  p.  478. 

Z18  C118 


11^]     REASONABLENESS  IN  DECISIONS  OF  COURTS      ng 

considered.  The  material  of  court  decisions  bearing  on 
this  is  so  meagre,  that  even  the  common  law  must  look 
chiefly  to  decisions  of  the  Interstate  Commerce  Commis- 
sion for  its  precedents. 

In  the  first  place,  as  to  the  connection  between  single 
rates  and  total  earnings,  the  financial  necessity  of  a  road 
cannot  justify  any  and  all  practices  which  might  bring 
up  the  earnings  nearer  to  a  reasonable  level.'  If  the 
general  rate  of  earnings  is  unreasonably  low,  a  strong 
presumption  is  created  against  holding  any  rate  un- 
reasonably high,  but  nevertheless  a  public  service  com- 
pany cannot  lawfully  charge  in  any  event  more  than  the 
services  are  *'  reasonably  worth"  to  the  individuals,  evenl 
if  charges  so  limited  would  fail  to  produce  a  fair  return! 
to  the  company  upon  the  values  of  its  property  or  in- 
vestment.* Thus  the  courts  assume  the  power  to  compel 
carriage  at  less  than  cost  over  parts  of  a  system  provided 
the  return  for  the  system  as  a  whole  covers  cost,^  or 
even  in  special  cases  where  the  whole  system  must  be 
run  at  a  loss.  The  rule  of  total  cost  works  always  against 
the  railways,  but  not  always  in  their  favor. 

Where  this  is  done,  the  most  definite  standard  that 
can  be  used  to  modify  that  of  total  cost  is  probably  that 
of  rates  charged  for  similar  services  rendered  by  other 
carriers  under  substantially  similar  conditions.  For  ex- 
ample, "The  Eureka  Springs  Railway  Company  received 
....  about  nine  times  the  average  amount  received  by 
the  railway  companies  operating  lines  in  said  States  and 
Territories  so  grouped,  because  of  similarity  of,  or  in  re- 

'Jerome  Hill  Cotton  Co.  v.  Mo.  K.  &  T.  Ry.,  6  I.  C.  C.  Rep.,  6oi. 
*Mr.  Justice  Savage,  in  Brunswick   &  Topeham  Water    District  v. 
Marine  Water  Co.,  99  Me.,  371. 
'Railway  Co.  v.  Gill,  54  Ark.,  112. 


I20  LOCAL  FREIGHT  DISCRIMINATIONS  [120 

spect  to,  density  of  population,  topography  and  nature 
of  the  country,  character  of  industries  served  by  railways 
and  other  characteristics  affecting  the  question  of  the 
cost  and  reasonable  compensation  for  railway  service."' 
In  the  matter  of  relative  rates  over  different  parts  of  a 
large  system,  the  doctrine  of  comparative  cost  is  followed 
in  the  decisions,  subject  to  the  above  qualification.  On 
branches  unwisely  or  very  disadvantageously  located, 
reasonableness  may  require  rates  that  fail  to  cover  cost, 
while  the  profitable  part  of  the  line  may  not  be  allowed 
to  make  good  this  deficit.^  But  apart  from  this,  branches 
or  divisions  on  which  because  of  high  cost  of  construc- 
tion or  sparse  traffic  or  other  conditions  the  cost  of 
carriage  is  high,  should  normally  adjust  their  rates  ac- 
cordingly ;  3  that  is,  in  a  general  way  the  law  of  compar- 
ative cost  should  be  followed.  The  same  principle  is  to 
be  followed  in  settling  the  reasonableness  of  extr^  high 
local  rates  which  are  justified  by  high  costs  of  handling,* 
but  in  this,  as  in  th^  case  of  whole  branches  where  traffic 
is  sparse,  there  is  a  tendency  to  consider  that  the  differ- 
ence of  charge  to  be  reasonable  must  be  less  than  would 
be  justified  by  the  difference  in  cost  if  that  alone  were 
considered. 5  Such  a  doctrine  clearly  corresponds  to  the 
"infant  industry"  policy  which  modifies  the  law  of  com- 
parative cost  in  the  field  of  international  trade.  "Where 
a  costly  plant  is  built  with  the   purpose  of  supplying  a 

'Gary  v.  Eureka  Springs  Ry.,  7  I.  C.  C.  Rep.,  286;  case  decided  in 
favor  of  complainant.  See,  also,  Int.  Com.  Com.  v.  Louisville  & 
Nashville  Ry.,  118  Fed.,  613. 

^Steenerson  v.  G't.  Northern  Ry.,  71  Minn.,  353. 

'WeUman  v.  Chi.  &  Gd.  T.  Ry.,  83  Mich.,  592.  Smyth  v.  Ames, 
169  U.  S.,  466. 

*N.  Pac.  Ry.  v.  Keyes,  91  Fed.,  47. 

''Beale  &  Wyman,  op.  cit.,  450. 


1 


f^       OF    THH  A 


121  ]     REASONABLENESS  IN  DECISIONS  OF  COURTS      121 

large  future  population,  the  customers  served  before  the 
full  development  cannot  be  forced  to  pay  the  full  ex- 
pense. The  .  .  .  company  must  recoup  itself,  if  at  all, 
by  charging  these  losses  to  construction  account  as  part 
of  the  cost  of  establishment."  '  By  this  system  of  book- 
keeping the  infant,  if  he  ever  matures,  pays  automatically 
the  cost  of  his  own  rearing.  The  inclusion  of  such 
necessary  losses  as  part  of  the  necessary  capital  invest- 
ment is  practiced  by  commissions. 

Having  disposed  of  the  question  of  apportioning  the 
costs  as  between  freight  and  passenger  trafBc,  and  se- 
cured theoretically  at  least  a  separate  freight  service  with 
its  own  distinct  earnings  and  expenses,  the  problem  next 
arises  of  applying  the  cost  standard  to  separate  ship- 
ments. In  this  several  methods  are  possible.  The 
special  costs  may  be  traced,  so  far  as  this  is  possible,  and 
compared  with  each  other ;  and  this  method  is  the  most 
nearly  correct  in  theory  and  the  least  practicable.  For 
if  only  those  items  were  included  which  were  directly 
traceable  to  single  shipments  or  small  units  of  traffic,  the 
result  would  be  invalid ;  it  would  be  too  small  to  be 
economically  correct.''  A  variation  of  this  method  would 
be  to  apportion  the  more  general  operating  expenses  to 
the  particular  traffic  involved,  each  item  of  expense  being 
apportioned  according  to  the  particular  service-unit 
which  has  the  most  direct  effect  on  it  and  with  which 
it  varies  most  closely.  For  instance,  renewals  of  rails 
might  be  apportioned  according  to  the  gross-ton-mileage 
and  the  cost  of  renewal  per  gross-ton-mile  could  be 
found.     Then  if  the  gross-ton-mileage  due  to  the  par- 

'  Beale  &  Wytnan,  op.  cit.,  p.  451.     See  Mr.  Justice  Holmes  in  San 
Diego  Land  &  Town  Co.  v.  Jasper,  189  U.  S.,  439. 

*  See  latter  part  of  chap,  i,  supra. 


122  LOCAL  FREIGHT  DISCRIMINATIONS  [122 

ticular  traffic  is  known,  its  share  of  that  class  of  expense 
is  a  matter  of  simple  arithmetic.  Other  expenses  might 
be  apportioned  according  to  net  tonnage,  or  to  train  or 
engine  mileage,  and  then  reapportioned  on  to  the  traffic 
in  question,  according  to  the  number  of  net  tons,  or  to  the 
engine  miles  which  are  in  the  long  run  special  to  it.  This 
method  gives  a  very  close  approximation  to  the  costs  which 
are  in  the  long  run  special  to  each  considerable  category 
of  traffic,  and  which  are  therefore  the  ones  that  should 
govern  in  rate-making.  Allowance  for  special  service 
conditions,  size  of  cars,  etc.,  may  be  made  as  minutely  as 
railway  statistics  will  allow.  This,  then,  is  the  most 
satisfactory  method  on  the  whole;  but  it  requires  most 
minute  knowledge  of  the  railway's  affairs,  such  as  the 
courts  are  not  in  a  position  to  obtain.  Moreover,  once 
the  apportionment  of  costs  to  service  units  is  made,  it 
stands  as  the  basis  to  which  any  cases  coming  up  may 
be  referred.  This  method  is  more  suited  to  use  by  a 
rate-making  commission  with  the  broadest  powers  than 
by  a  court  enforcing  the  common  law. 

A  simpler  and  less  accurate  method,  but  an  easier  one, 
is  that  of  apportioning  all  costs  on  some  one  simple 
traffic  unit,  as  the  ton-mile,  for  instance,  thus  getting  an 
average.  The  variation  of  any  particular  service  from 
that  average  can  then  be  estimated,  reference  being  had 
to  the  special  costs  that  are  easily  measurable,  both  for 
the  purpose  of  deciding  how  much  the  given  traffic  varies 
from  the  average,  and  of  furnishing  a  definite  minimum 
as  a  check  to  the  rough  estimates.  This  method  is  the 
most  nearly  suited  to  the  limitations  of  the  ordinary 
court. 

Another  method  easily  open  to  a  tribunal  having 
specific  cases  to  consider  is  to  ascertain  only  those  spec- 
ial costs  most  clearly  traceable  to  the  traffic  involved  in 


123]     REASONABLENESS  IN  DECISIONS  OF  COURTS      123 

the  particular  case,  and  to  add  a  tentative  loading  for 
other  operating  costs  apportioned  roughly  on  the  basis 
of  the  costs  already  found.  If  the  traffic  has  been 
charged  with  its  full  share  of  certain  expenses,  as  wages 
of  trainmen,  cost  of  fuel,  oil  and  waste,  renewals  and  re- 
pairs of  engines  and  cars,  and  if  these  items  make  up  40 
per  cent  of  the  road's  whole  cost  of  operation,  then  ^^ 
or  250  per  cent  of  the  traced  costs  would  furnish  a 
rough  approximation  to  that  traffic's  pro-rata  share  of 
the  operating  costs. '  This  furnishes  some  guide  as  to 
whether  the  contribution  toward  capital  expenses  made 
by  the  traffic  in  question  is  more  or  less  than  the  aver- 
age, and  how  much. 

Obviously  such  a  standard  is  so  inaccurate  that  it  can- 
not be  used  as  a  quantitative  or  an  independent  standard 
of  rates.  It  can  only  be  "considered  along  with  other 
factors"  and  it  establishes  little  more  than  that  "the 
carriage  of  some  goods  is  known  to  be  more  expensive 
than  that  of  others."'  Thus  the  scope  of  the  cost 
standard  of  reasonableness  under  the  common  law  is 
narrowly  limited.  Between  rates  that  will  be  held  to  be 
entirely  unremunerative,  and  those  that  are  so  high  as 
to  be  held  unreasonable  per  se,  there  is  a  sufficiently 
wide  margin  for  almost  any  kind  of  practice.  In  judging 
of  the  reasonableness  of  the  net  earnings  secured  from 
any  rate,  further  standards  are  afforded  by  "comparison 
with  other  rates,"  by  "commercial  conditions,"  and 
finally  by  the  general  standards  of  tax-policy,  regarding 
the  rate,  or  net-earnings  portion  of  it,  as  a  "tax  imposed 
by  a  public  servant  for  the  performance  of  a  quasi-public 

*In  Re  Advances  in  Freight  Rates,  9  I.  C.  C.  Rep.,  382,  397. 
'Beale  &  Wyman,  op.  cit.,  p.  462. 


124  LOCAL  FREIGHT  DISCRIMINATIONS  [124 

duty."'     All  of  these  standards  in  application  fail  some- 
what in  definiteness. 

So  far  we  have  been  considering  the  doctrine  of 
reasonableness  by  itself.  We  may  now  go  on  to  the 
more  definite  doctrine  of  discrimination  or  of  relative 
reasonableness.  This  is  an  addition  to  the  legal  concept 
of  reasonable  charges,  growing  out  of  the  situation  of 
competing  producers,  to  whom  a  slight  difference  in 
rates  means  business  life  or  death. ""  It  seems  to  be 
based  legally  on  the  obligation  to  serve  all  comers 
alike,3  which  can  of  course  be  nullified  by  discrim- 
inating charges,  and  by  very  slight  discriminations  if  the 
customers  are  competing  producers.  Thus  in  either 
case  justice  as  between  competitors  is  the  only  consid- 
eration which  can  well  be  used  to  declare  small  discrim- 
inations illegal.  This  doctrine  applies  most  easily,  of 
course,  to  personal  discriminations.  In  passing  to  local 
discriminations,  definiteness  is  lost,  and  it  becomes  diffi- 
cult to  establish  with  certainty  that  there  is  a  dispropor- 
tion which  is  clearly  important  in  amount,  and  for  which 
the  responsibility  rests  clearly  with  the  carrier  rather 
than  with  some  circumstance  of  service  or  of  commercial 
situation  which  is  beyond  his  control."^  In  general,  the 
presumption  is  bound  to  be  in  favor  of  the  practice  of 
the  roads,  so  that  against  local  discriminations  the  com- 
mon law  is  ineffective. 

Indeed,  almost  all  practices  may  be  justified  by  com- 
petition, t.  e.,  all  which  are  necessary,  dona  fide,  to  se- 

'In  Re  Proposed  Advances  in  Freight  Rates,  9  I.  C.  C.  Rep.,  382, 

434- 

*BeaIe  &  Wyman,  op.  cit.,  p.  679. 

'Fitzgerald  v.  Grand  Trunk  Ry.  Co.,  63  Vt.,  169,  and  other  cases. 

♦Commercial  Club  of  Omaha  v.  Chicago  &  N.  Ry.,  7  I.  C.  C.  Rep., 
386,  404. 


125]     REASONABLENESS  IN  DECISIONS  OF  COURTS      125 

cure  any  traffic  which  can  be  made  to  contribute  any- 
thing to  net  earnings.  But  the  question  whether  real 
competition  exists/  and  whether  the  rates  in  question 
are  not  so  low  as  to  be  unremunerative  and  an  actual 
burden  on  the  rest  of  the  traffic,  are  matters  of  fact  to 
be  settled  by  the  tribunal.  If  competition  of  this  nature 
were  found,  the  earning  of  reasonable  dividends  on  the 
whole  business  would  be  evidence  that  the  local  rates 
were  unreasonably  high."  Thus  a  certain  limitation  is 
placed  on  the  extent  to  which  competition  of  rates  may 
go.  Otherwise,  the  settling  of  problems  of  local  dis- 
crimination seems  to  rest  on  the  fact  that  the  lower 
rates  may  have  considerable  weight  as  evidence  that  the 
higher  rates  are  in  and  of  themselves  unreasonable. ^ 

To  sum  up,  then,  the  results  of  a  search  for  standards 
in  the  common  law,  the  cost  standard  is  prominent,  but 
prevented  from  being  used  definitely  by  the  absence  of 
any  regular  method  of  apportionment,  and  by  the  lack  of 
detailed  statistics  suited  to  the  purpose.  There  appears 
also  the  "  established  interests  "  standard  and  the 
"infant-industry"  standard. 

The  various  state  and  federal  statutes  furnish  a  further 
source  of  legal  standards  of  reasonableness,  and  especially 
the  cases  settled  by  commissions  acting  under  these 
statutes  are  valuable  for  this  purpose.  In  the  present 
study  space  permits  only  some  consideration  of  the  fed- 
eral statute  law.  In  the  general  enforcement  of  reason- 
able rates  and  prevention  of  undue  preferences,  the  law 
adds  little  to   the    principles   already  developed.      It    is 

'Judge  Taft  in   E.  Tenn.,  Vir.   &  Ga.   Ry.  v.  Int.  Com.  Com.,  99 
Fed.,  52,  39  C.  C.  A.,  413. 

»In  Re  Chicago,  S.  &  P.,  K.  C.  R.  Co.,  2  Inst.  Com.  Rep,,  137,  a 
I.  C.  C.  Rep.,  231. 

*Int.  Com.  Com.  v.  Southern  Ry.,  117  Fed.,  741. 


126  LOCAL  FREIGHT  DISCRIMINATIONS  [126 

interesting  to  note  that  rates  must  always  be  regulated 
downward  if  at  all,  and  never  upward,  even  though  they 
may  be  ruinously  low.  Under  such  circumstances,  the 
commission  would  logically  be  justified  in  reducing  any 
other  rates  that  might  be  found  unreasonably  high,  even 
though  total  earnings  were  thereby  made  unreasonably 
low.  On  these  general  rulings  the  statute  and  common 
law  are  the  same.' 

In  the  matter  of  discrimination,  however,  and  espec- 
ially of  local  discrimination,  the  wording  of  the  statutes 
and  the  powers  of  the  commission  have  given  oppor- 
tunity for  regulation  which  is  impossible  under  the  com- 
mon law.  Moreover,  the  nature  of  the  problem  admits 
of  more  definite  and  satisfactory  settlement,  for  such 
cases  are  simpler  than  those  involved  in  deciding  whether 
rates  are  reasonable  ''in  and  of  themselves."  The  em- 
phasis is  laid  on  fewer  and  simpler  considerations. 

Passing  at  once  to  the  question  of  local  discrimina- 
tion, we  find  the  comparative-cost  standard  a  prominent 
one.  For  instance,  in  the  matter  of  raw  material  and 
finished  product,  where  the  carriage  of  these  two  truly 
competes,  the  law  stands  that,  "  the  proper  relation 
should  be  determined  from  the  cost  of  the  service,  and 
if  the  difiference  in  this  respect  between  two  competitive 
articles  can  be  ascertained,  such  rate  should  be  fixed  for 
each  as  corresponds  to  the  cost  of  the  service."*  One 
of  the  standards  of  reasonableness  which  in  practice  is 
most  prominent  in  modifying  the  cost  standard  is  that 
of  equalizing  competing  producers  and  so  enabling  the 
market  served  to  get  the  benefit  of  more  active  competi- 
tion, while  increasing  the  number  of  producers  who  get 

'Beale  &  Wyman,  op.  cit.,  §  918,  pp.  845-6. 

*  Squire  v.  Michigan  Central  Ry.,  4  I.  C.  C.  Rep.,  611. 


127]     REASONABLENESS  IN  DECISIONS  OF  COURTS      127 

a  chance,  at  least,  at  the  market.  On  this  question  the 
common  law  is  indefinite.  It  allows  the  practice  within 
limits,  but  the  limits  are  no  more  definite  than  the  vari- 
ous opinions  of  separate  judges  on  the  question  what, 
in  particular  cases,  public  policy  demands.  It  is  hard 
to  say  definitely  what  standard  of  public  policy  lies  back 
of  this  practice.  Perhaps  the  clearest  is  the  one  that 
might  be  called  the  "symmetrical  development"  stand- 
ard. "A  considerable  extent  of  territory  containing  a\ 
large  number  of  mines,  quarries  or  manufacturing  estab- 
lishments, has  frequently  been  given  identical  freight 
rates  upon  the  ground  that  otherwise  the  more  distant 
points  would  be  driven  from  the  market  and  thus  im- 
portant industries  might  be  ruined,  resulting  indirectly 
in  serious  loss  of  revenue  to  the  road." '  Here  we  have 
the  "established  interests"  standard,  already  noted;' 
but  there  is  surely  more  in  it  than  that.  For  no  argu- 
ment from  "established  interests"  could  apply  where 
such  group  rates  are  used  in  the  developing  of  a  new 
section,  or  of  new  business  in  an  old  one.  Probably 
the  widespread  practice  of  grouping  destinations  is  in 
part  due  to  the  fact  that  of  the  possible  methods  of  com- 
promising a  too  fierce  and  direct  competition  between 
roads  for  common  markets,  the  grouping  practice  affords 
the  method  least  suggestive  of  "restraint  of  trade."  As 
compared  to  the  practice  of  dividing  the  field,  it  cer- 
tainly seems  to  promote  rather  than  limit  competition  of 
producers,  and  does  not  make  it  quite  so  obvious  that 
the  competition  of  railways  has  been  settled  by  an  agree- 
ment. It  makes  a  show,  at  least,  of  widening  rather 
than  stifling  competition. 

» Howell  V.  N.  Y.    L.   E.   &  W.   Ry.,  2  I.  C.   C.  Rep.,  272,  2  Int. 
Com.  Rep.,  162. 

*See  supra,  p.  63. 


128  LOCAL  FREIGHT  DISCRIMINATIONS  [128 

But  the  grouping  of  points  of  origin  must  be  based 
on  a  different  principle ;  there  is  a  certain  public  policy 
involved.  Where  it  is  a  question  of  using  up  natural 
resources  this  i§  quite  clear.  Ultimatel}',  it  may  be 
assumed,  all  these  resources  will  be  needed  and  developed 
down  to  those  of  lower  grade  and  more  inaccessible  than 
are  now  worked.  A  tariff  sticking  close  to  cost  might 
easily  give  the  best  located  ones  such  an  advantage  that 
they  would  be  worked  hard  and  worked  out  compara- 
tively soon.  Then  the  more  poorly-located  fields  would 
come  into  requisition  and  an  unnecessarily  wasteful  shift- 
ing of  population  and  capital  would  have  to  be  made. 
This  would  involve  economic  loss  which  would  be 
avoided  by  anything  which  would  cause  the  two  grades 
of  resource  to  be  developed  at  the  same  time,  each  less 
intensively.  Such  a  policy  would  clearly  pay,  even 
though  for  the  time  being  labor  and  capital  were  used  in 
ways  less  immediately  advantageous  than  the  best  that 
could  be  found.  For  example,  such  a  shifting  of  the 
source  of  supply  occurred  when  the  northwestern  white 
pine  forests  were  used  up,  and  the  southern  yellow  pine, 
which  had  formerly  been  burdened  with  relatively  high 
rates,  became  a  chief  source  of  supply.  Such  a  shifting 
of  centers  of  production  causes  many  complications  and 
may  well  cause  wastes  of  capital.  Plants  for  the  manu- 
facture of  sash,  doors  and  blinds,  established  in  Oshkosh, 
to  work  up  the  northwestern  lumber,  are  now  forced  to 
bring  their  raw  material  from  the  southwest.  They  are 
thus  badly  located  for  the  present  conditions  of  produc- 
tion, and  the  resulting  waste  is  directly  traceable  to  the 
fact  that  different  centers  of  supply  have  been  developed 
successively. '     Clearly,  a  policy  making  for  a  symmetri- 

^McPherson,  Railroad  Freight  Rates,  p.  135. 


129]     REASONABLENESS  IN  DECISIONS  OF  COURTS      129 

cal  development  of  many  areas  at  once  without  quickly 
exhausting  any,  would  tend  to  reduce  this  waste  and  so 
be  of  economic  benefit. 

A  similar  line  of  argument  might  be  used  to  support 
the  building-up  of  an  industry  or  of  agriculture,  in  places 
in  which  the  growing  demands  of  society  will  ultimately 
call  them  forth  in  any  case,  but  where  for  the  present 
they  are  under  a  slight,  but  decisive,  disadvantage. 
Thus  the  "  symmetrical  development "  standard  in  a  cer- 
tain way  corresponds  with  the  infant  industry  argument, 
and  in  so  far  as  it  does  so  it  could  hardly  be  used  to 
justify  a  permanent  policy.  Further  than  this,  however, 
there  is  a  well-founded  and  general  belief  that  it  is  well, 
on  other  than  purely  economic  grounds,  to  spread  popu- 
lation and  prosperity  as  uniformly  as  possible,  and  es- 
pecially to  bring  it  about  that  our  centers  of  industry, 
trade,  wealth  and  the  culture  and  prestige  which  go  with 
them,  shall  be  many  and  scattered,  rather  than  few  and 
concentrated.'  This  idea  has  played  a  considerable  part 
in  railway  rate  regulation  policies  ;  as,  for  instance,  in 
Texas,  under  the  influence  of  Judge  Reagan.^  In  that 
state  the  "  common-point "  system  was  evolved,  a  sys- 
tem peculiarly  suited  to  the  scattering  of  the  jobbing 
business  in  small  centers,  and  a  system  distinctly  at 
variance  with  the  ''comparative  cost"  idea. 

As  to  the  limitations  put  upon  this  equalizing  policy 
in  the  way  of  keeping  somewhere  near  a  comparative 
cost  basis,  they  seem  in  some  cases  to  be  very  slight. 
The  maximum  limits  are  the  points  at  which  the  rate  to 
the  farther  station  is  unremunerative,  or  where  that  to 
the  nearer  point  is    unreasonably   high  per  se.  ^      This 

^  Ross,  Social  Psychology,  chap.  xi.        "McPherson,  op.  cit.,  p.  94. 
'Howell  V.  N.  Y.,  L.  E.  &  W.  Rr.,  2  Int.  Com.  Rep.,  162,  2  I.  C. 
C.  Rep.,  272. 


130  LOCAL  FREIGHT  DISCRIMINATIONS  [130 

would  be  true  even  under  the  common  law.  Most  com- 
missions would  be  far  more  strict,  and  would  declare 
group  rates  unreasonable  if  they  equalized  any  very  de- 
cided and  substantial  natural  differences.  However, 
even  commission  regulation  is  a  trifle  indefinite  on  this 
point.  The  Interstate  Commerce  Commission  will  con- 
sider only  cases  in  which  the  towns  involved  are  neigh- 
bors, similar  in  size,  situation  and  volume  of  competing 
traffic'  But  such  complete  similarity  is  rather  unusual, 
and  in  general  it  may  be  said  that  where  the  roads  have 
refused  to  equalize  existing  disadvantages  they  are  not 
forced  to  do  so,^  and  where  they  have  done  so  volun- 
tarily they  will  not  within  fairly  wide  limits  be  forced  to 
undo  their  work.  In  its  early  days,  it  is  true,  the  com- 
mission was  inclined  to  consider  equal  mileage  rates  as 
prima  facie  reasonable,  and  held  in  one  case  that  any  de- 
parture from  such  rates  must  bear  the  burden  of  prov- 
ing itself  reasonable.^  This  attitude,  however,  has  since 
been  abandoned,  and  the  burden  of  proof  that  any  rate 
is  unreasonably  high  rests  upon  the  complainant.''  How- 
ever, the  Interstate  Commerce  Commission  has  repeat- 
edly held  that  where  it  can  be  shown  that  a  road  has 
deliberately  equalized  existing  inequalities  in  natural  ad- 
vantages for  production,  as  between  places  so  located 
that  valid  comparison  can  be  made,  such  practice  is  un- 
reasonable.^     In    such    cases,  of    neighboring    localities 

»Eau  Claire  Board    of  Trade  v.  Chicago,  M.   &  St.  P.   Ry.,   4  Int. 
Com.  Rep.,  65,  5  I.  C.  C.  Rep.,  264. 

*  Freight  Bureau  v.  Cincinnati,  N.  O.  &  T.  P.  R.  Co.,  4  Int.  Com. 
Rep.,  592,  6  I.  C.  C.  Rep.,  115. 

'Commissioner  Veasey  in  Logan  v.  Chicago  N.  W.  Rr.  Co.,  2  Int. 
Com.  Rep.,  431,  2  I.  C.  C.  Rep.,  604  (1889). 

*  Lincoln  Creamery  v.  Union  Pac.  Ry.,  3  Int.  Com.  Rep.,  794. 
»Eau  Claire  Board  of  Trade  v.   Chicago,  M.   &  St.  P.   Ry.,  4  Int. 


13 1  ]   REASONABLENESS  IN  DECISIONS  OF  COURTS     131 

under  generally  similar  conditions,  distance,  it  is  held, 
should  govern.  Thus  the  standard  of  symmetrical  de- 
velopment at  expense  of  present  equality  of  treatment 
gets  little  recognition  from  the  Commission,  but  it  will, 
if  it  can,  prevent  the  smoothing-out  of  natural  in- 
equalities. 

In  a  general  view  of  the  work  of  the  commission,  two 
broad  characteristics  of  policy  stand  out.  In  the  first 
place,  it  is  making  no  attempt  to  apply  a  universal 
scheme  of  rates,  a  rule  or  rules  of  automatic  reasonable- 
ness. Even  were  its  members  to  work  out  for  their 
own  guidance  some  such  system,  they  would  not  attempt 
to  impose  it  upon  the  country.  In  the  language  of  one 
of  their  own  recent  decisions  :' 

The  Commission  .  .  .  must  deal  with  the  interstate  rates  of 
this  country,  which  have  not  been  established  upon  any  con- 
sistent theory,  as  it  finds  them  .  .  .  Unless  therefore  the  gen- 
eral result  of  all  rates  is  to  yield  an  undue  revenue  to  the 
carrier,  the  Commission  should  not  reduce  a  particular  rate 
simply  because  it  might  think,  if  establishing  that  rate  de 
novo  as  part  of  a  general  scheme,  that  it  ought  to  be  some- 
what lower  or  somewhat  higher  in  proportion  to  others. 
The  rate  attacked  must  be  so  out  of  proportion  as  to  be  un- 
reasonable or  must  be  unlawful  for  some  other  special  reason. 

Not  perfect  adjustments,  but  the  righting  of  the  more 
considerable  maladjustments,  then,  is  the  aim  of  that 
body. 

Indeed,  the  "established  interests"  rule  of  reasonable- 

Com.  Rep.,  68,  5  I.  C.  C.  Rep.,  264.  Freight  Bureau  v.  Cin.  N.  O. 
&  T.  P.  Ry.,  7  I.  C.  C.  Rep.,  180.  Central  Y.  P.  Association  v. 
Vicksburg  S.  &  P.  Rr.,  10  I.  C.  C.  Rep.,  193,  etc. 

'Corn  Belt  Meat  Producers'  Ass.  v.  Chicago,  B.   &  Q.  Ry.  Co.  et 
-al.,  14  I.  C.  C.  Rep.,  376. 


{ 


132  LOCAL  FREIGHT  DISCRIMINATIONS  [132 

ness  itself  compels  such  conservatism.  Thus,  for  in- 
stance, in  dealing  with  a  case  in  which  relative  distance 
was  disregarded  in  the  "  meeting  "  of  market  competi- 
tion, the  commission  acquiesces  in  the  general  practice, 
I  but  holds  that  distance  must  govern  the  rates  on  that 
'  route  over  which  the  greatest  vohime  of  traffic  moves. 
The  case  was  one  in  which  a  region  enjoyed  competition 
of  producers  shipping  from  the  east  and  also  from  the 
south.  But  as  between  different  points  in  the  region, 
the  differentials  originally  fixed  by  the  eastern  lines  were 
adopted  by  all  the  others,  so  that  the  southern  and 
western  lines  made  higher  rates  to  the  more  western 
towns,  regardless  of  distance.  Thus  shipments  from 
southern  points  to  Lincoln,  Neb.,  cost  more  than  to 
Omaha,  though  distances  and  costs  were  substantially 
the  same.  It  is  obvious  that  if  the  practice  of  "just 
meeting"  competition  or  of  meeting  it  with  equal  force 
over  a  considerable  area,  is  to  be  followed,  one  or  the 
other  set  of  competing  rates,  or  both,  must  thus  disre- 
gard distance.  The  upshot  of  the  decision  in  this  case 
was,  that  the  smaller  competitor  (in  volume  of  traffic) 
may  reasonably  make  disproportionate  rates  in  going  to 
meet  the  larger  one,  but  the  larger  shall  not  so  go  to 
meet  the  smaller. ' 

Somewhat  similar  is  the  ruling  that  roads  engaging  in 
competition  may  take  things  as  they  find  them  and 
meet  the  competition  already  existing,  but  may  go  no 
farther  in  twisting  their  rates  out  of  shape  than  is  neces- 
sary to  do  this.''     Once  the  new  road  is  in  the  business, 

^Lincoln  Commercial  Club  v.  Chicago,  R.  I.  &  P.  Ry.  Co.  et  al.,. 
13  Int.  Com.  Rep.,  319. 

^ Grain  Shipper's  Ass.  v.  111.  Central  Ry.,  8  I.  C.  C.  Rep.,  158. 
Cannon  Falls  F.  E.  Co.  v.  Chicago  G.  W.  Ry.,  10  I.  C.  C.  Rep.,  650,. 
etc. 


133]    REASONABLENESS  IN  DECISIONS  OF  COURTS    133 

■no  one  will  say  that  the  force  of  competition  tending  to 
lower  rates  has  not  been  increased,  and  no  one  can 
measure  the  increase.  The  Commission  is  well  aware  of 
this,'  but  adopts  its  ruling  as  a  measure  calculated  to 
limit  the  amount  of  war  discriminations  without  hamper- 
ing the  roads  so  as  to  prevent  any  one  from  competing 
for  any  traffic  which  it  can  move  efficiently.  In  this 
ruling  there  is  evident  a  desire  to  limit  direct  competi- 
tion in  rates  and  center  it  on  service,  and  also  a  trace 
of  the  established-interests  or  established-adjustment 
idea. 

This  care  of  established  interests  is  in  general  given 
less  weight  by  the  Commission  than  by  the  courts.  In 
its  most  limited  and  most  clearly  valid  form,  the  doctrine 
merely  forbids  any  action  which  would  needlessly  destroy 
the  value  of  existing  capital  by  rendering  its  product 
unmarketable.  Aside  from  this  it  recognizes  no  vested 
right  to  do  business  or  to  have  expectations  of  growth 
fulfilled.  Still  this  wider  interpretation  appears  to  be  the 
controlling  motive  in  the  recent  circuit-court  decision 
by  which  the  Interstate  Commerce  Commission's  order 
in  the  Missouri  Rate  Case  was  suspended  by  injunction. 
It  is  hard  to  see  how  otherwise  the  "laying  of  artificial 
hands  "  on  business  adjustments  appears  in  this  case  in 
any  different  sort  from  its  occurrence  in  other  rate 
rulings,  though  of  course  the  results  are  here  unusually 
far-reaching.  The  hands  of  the  Commissioners  are  no 
more  artificial  when  fixing  the  Mississippi-to-Missouri 
River  proportional  than  when  fixing  any  other  rate,  even 
if  they  are  conceded  to  be  a  more  artificial  variety  of 
hands  than  those  of  the  railway  traffic  men.  It  seems 
clear,  then,  that   it  is  not  the  artificiality  of  the  adjust- 


1  (< 


St.  Cloud  Case,"  8  Int.  Com.  Rep.,  346. 


134  LOCAL  FREIGHT  DISCRIMINATIONS  [134 

ment,  but  the  vested  interests  of  the  businesses  affected^ 
and  the  extent  to  which  they  would  be  disturbed,  which 
governed  the  minds  of  the  majority  of  the  circuit  court 
in  this  case. 

A  second  general  feature  of  the  Commission's  work  is 
the  emphasis  which  it  seems  necessary  to  lay  on  the 
cause  or  motive  of  a  practice  complained  of,  rather  than 
the  substance  of  the  practice  itself,  in  deciding  whether 
it  is  unlawful.  For  instance,  the  fact  that  a  road  can 
get  reshipments  and  a  longer  total  haul  out  of  traffic 
moving  to  one  market  than  to  another,  taken  in  connec- 
tion with  the  fact  that  its  rates  are  disproportionately 
fixed  so  as  to  favor  the  former  market,  is  a  strong  bit  of 
evidence  that  the  adjustment  is  selfish  and  arbitrary  and 
hence  unreasonable.  '  And,  similarly,  an  adjustment 
obviously  intended  to  "divide  the  field  "  and  assign  the 
products  of  one  section  to  one  market,  and  those  of 
another  to  another,  is  an  evident  creating  of  artificial 
differences  in  market  conditions,  and  is  arbitrary  and 
unreasonable. ""  Preferential  treatment  of  a  city  which 
has  subscribed  to  the  building  of  the  road  is  held  un- 
lawful.^ 

Such  emphasis  on  motive  is  natural  and  really  neces- 
sary, but  the  impression  cannot  be  escaped  that  it  is 
more  suited  to  the  punishment  of  personal  crimes  or 
misdemeanors  than  to  the  enforcing  of  a  far-reaching 
economic  policy.  For  the  latter  should  be  judged  by 
economic  results,  not  by  good  intentions  or  extenuating 

'  In  Re  Export  Rates  from  Points  East  &  West  of  Miss.  River,  8 
I.  C.  C.  Rep.,  185. 

^Savannah  Bureau  of  Freight  &  Trans,  v.  Louisville  &  Nashville 
Rr.,  8  I.  C.  C.  Rep.,  277- 

•''Lincoln  Board  of  Trade  v.  Burlington  &  M.  R.  Rr.,  2  Int.  Com^ 
Rep.,  95,  2  L  C.  C.  Rep.,  147. 


135]     REASONABLENESS  IN  DECISIONS  OF  COURTS      135 

circumstances ;  the  policy  of  a  public  agent  of  such  vast 
importance  as  a  railway  system  should  if  possible  be  so 
firmly  under  control  as  to  be  superior  to  such  considera- 
tions of  conflicting  private  interests.  Whether  such 
control  would  be  worth  what  it  would  cost  us,  in  the 
abolishing  of  our  remnants  of  railway  competition,  is 
another  question ;  but  at  least  the  weight  given  to  dis- 
turbing circumstances  in  our  Federal  rate  regulation  is, 
as  far  as  it  goes,  a  confession  of  inability  to  enforce  a 
policy  aimed  consistently  at  a  purely  economic  goal. 

We  may  sum  up  in  a  sentence  the  standards  govern- 
ing in  the  regulation  reviewed  above.  The  central  one 
is  that  of  comparative  cost ;  modified  toward  conserva- 
tism, especially  in  the  courts,  by  consideration  of  estab- 
lished interests ;  slightly  modified  by  the  "  infant  sec- 
tion "  idea ;  and  imperceptibly  if  at  all  by  the  standard 
of  symmetrical  development ;  but  modified  most  of  all 
by  necessary  concession  to  the  practices  which  must 
needs  go  with  private  competitive  rate-making,  especially 
that  of  making  "  blanket  rates  "  or  others  which  "  just 
meet "  competition  over  a  wide  area. 


CHAPTER  IX 

GENERAL  PRINCIPLES  OF    DISTANCE-TARIFFS 

Of  rates  based  on  mathematical  formulae  there  are 
three  main  kinds :  First  and  simplest  is  the  flat  rate, 
proportioned  directly  to  distance,  with  or  without  the 
addition  of  a  fixed  terminal  charge.  Such  rates  form 
the  basis  of  the  German  system,  being  applicable  to  all 
the  regular  classes  (with  the  exception  of  Stuckgut  and 
Spezialtarif  III).  However,  on  account  of  the  numer- 
ous exceptions  and  commodity-rates,  a  majority  of  the 
traffic  and  the  most  important  goods  move  under  tariffs 
of  different  form.'  Elsewhere  in  Europe,  this  form  of 
distance-scale  is  little  used.  In  America  it  furnishes  a 
convenient  basis  for  figuring  purely  local  rates  for  short 
hauls,  in  the  absence  of  any  considerations  to  the  con- 
trary. And,  as  is  well  known,  the  class-rates  in  the 
trunk-line  section  are  roughly  based  on  this  principle. 

Secondly,  there  is  the  zone^^system  of  rates.  The  dis- 
tinguishing marks  of  this  system  are,  first,  the  measur- 
ing of  distance  in  very  large  units  or  "zones,"  often 
progressively  large  ones ;  and  secondly,  the  fixing  of  a 
point  beyond  which  the  rate  ceases  to  increase,  no  mat- 
ter what  the  distance.^  In  other  words,  in  adjusting  the 
distance-units,  which  may  be  of  variable  length,  the  final 
one  simply  extends  to  infinity,  or  to  the  borders  of  the 

'Seidler  &  Freud,  op.  cit.,  p.  22. 

^jAlbert  Pauer,  Lehrbuch  des  Eisenbahntarifwesens  (Vienna,  1900) , 
p.  8. 

136  [136 


137]     GENERAL  PRINCIPLES  OF  DISTANCE-TARIFFS    137 

railway  system.  The  term  includes  also  the  limiting 
case  in  which  there  is  only  one  "  zone,"  t.  e.,  the  postage- 
stamp  system.  Indeed,  Rowland  Hill,  the  father  of 
England's  penny  postage,  is  also  credited  with  being  the 
father  of  the  zone-system  of  transportation  charges. 
The  zone-system  proper,  contrary  to  general  impression, 
is  not  in  use  at  the  present  time  for  freight.  It  has  been 
used  in  Hungary  since  1889,  but  for  passengers  and 
baggage  only.  As  to  the  Austrian  passenger  tariff  of 
1890,  the  use  of  distance  units  of  10,  15,  20,  25  and  50 
kilometers  justifies  the  use  of  the  term  "zone-tariff"  in 
describing  it,  but  it  lacks  the  characteristic  mark  of  a 
zone-tariff  proper,  in  that  there  is  no  distance  beyond 
which  charges  no  longer  increase — no  final  zone  extend- 
ing to  infinity.  It  is  thus  not  a  zone-tariff  of  the  ex- 
treme type.' 

Finally  and  most  important  is  the  falling  bar^me  or 
Staff eltarif ,  sometimes  called  in  English  the  system  of 
tapering  rates.  This  is  now  the  customary  basis  of 
European  freight  tariffs,  and  is  used  for  passenger  and 
baggage  rates  as  well.  In  this  form  of  tariff  the  rate 
increases  with  the  distance,  but  at  a  diminishing  rate.  ' 
For  the  first  50  kilometers,  let  us  say,  the  rate  per  kilo- 
meter remains  constant,  but  from  50  to  100  kilometers 
a  lower  rate  rules,  and  from  jog  to  200  kilometers  a  still 
lower  one.  There  are  two  ways  of  applying  this  prin- 
ciple. For  a  haul  of  more  than  50  and  less  than  100 
kilometers,  the  rate  may  be  found  by  adding  together 
the  regular  rate  for  50  kilometers  and  the  lower  rate  on 
the  excess  over  50  kilometers.  Or  the  lower  rate  may 
be  applied  to  the  whole  distance,  provided  only  it  does 
not  come  to  less  than  the  regular  50-kilometer  rate,  in 

^Pauer,  op.  cit.,  p.  25. 


138  LOCAL  FREIGHT  DISCRIMINATIONS  [138 

which  case  the  latter  will  be  taken.  The  second  method 
of  calculation  is,  of  course,  less  satisfactory  than  the 
first, for  it  produces  "groups"  or  "zones"  with  no  log- 
ical reason  for  their  existence.  Shipments  of  consider- 
ably more  than  50  kilometers  may  pay  only  the  50-kilo- 
meter charge,  for  no  economic  reason,  but  purely  because 
of  the  arbitrary  choice  of  this  method  of  calculating  the 
degression  of  the  rate.  By  the  other  method,  every 
kilometer  costs  something,  and  no  arbitrary  groupings 
are  made.  The  fifty-first  kilometer  costs  as  much  as  the 
ninety-ninth.  The  scale  would  thus  be  represented 
graphically  by  a  broken  line,  always  ascending,  but  less 
and  less  steeply  after  each  break.  The  former  system  of 
figuring,  on  the  other  hand,  still  further  breaks  the  line 
by  interposing  horizontal  sections,  and  is  an  inferior 
form  of  Staff eltarif . 

What  now  is  the  economic  basis  of  such  a  scale  of 
rates  ?  The  claim  is  made  for  it  that  it  is  based  on  the 
value  of  service  principle ;  a  claim  which  many  American 
railroad  men  would  be  slow  to  admit.  Indeed,  as  com- 
pared to  straight  mileage  rates,  the  Staffeltarif  is  surely 
a  step  towards  a  value-of-service  system.  But  if  it  is 
regarded  as  embodying  in  itself  the  fulfilment  of  that 
principle,  the  term  must  be  used  in  a  somewhat  different 
sense  from  that  common  in  American  discussions. 
What,  then,  is  the  foreigner's  idea  of  "value  of  service?" 

As  to  the  fundamentals  of  value,  there  is  no  marked 
peculiarity  in  the  viewpoint  on  which  the  Staffeltarif  is 
based.  Rank,  for  instance,'  cites  Jevons,  Menger  and 
Wieser  as  authorities.  Value  is  something  psycho- 
logical, an  individual  estimate  of  usefulness,  and  it  dimin- 
ishes as  the  individual's  supply  increases.     Applying  this 

'  Rank,  Eisenbahntarifwesen,  pp.  153  et  seq. 


139]     GENERAL  PRINCIPLES  OF  DISTANCE-TARIFFS    139 

to  railway  services,  their  values  vary  with  the  com- 
modity shipped,  the  time  when  shipment  is  made,  the 
place  to  which  it  is  made,  the  shipper  by  whom  it  is 
made,  and  the  consumer  who  ultimately  receives  the 
benefit.  Beside  these  are,  of  course,  the  important 
variable  elements  of  speed  and  regularity  of  service, 
which  are  of  far  more  importance  in  some  cases  than  in 
others.  Thus  practically  no  two  shipments  have  the 
same  value — subjective  value,  that  is.  But  there  is  no 
stopping  here,  and  it  is  not  "subjective  value"  which 
governs  railway  charges,  at  least  not  the  subjective 
values  of  individual  shipments. 

In  the  first  place,  no  service  can  be  rendered  whose 
value  does  not  exceed  its  cost,  and  the  continental 
methods  of  computing  costs  for  rate-fixing  purposes  in- 
volve far  more  of  averaging  and  prorating  of  general 
items  than  do  American  methods.  Moreover,  the 
European  is  inclined  to  be  stricter  in  the  matter  of 
granting  single  rates,  which  will  not  contribute  their 
pro-rata  share  toward  the  general  outlays,  whereas  on 
American  railways  all  that  is  required  is  that  a  given 
class  of  trafific  should,  in  the  long  run,  cover  its  pro-rata 
share  of  all  the  operating  expenses,  and  also  give  what 
seems,  all  things  considered,  a  reasonable  contribution 
toward  the  fixed  charges.  If  the  general  result  is  thus 
satisfactory,  there  is  little  disposition  to  apply  the  pro- 
rata test  too  sharply  to  individual  concessions. 

The  more  enterprising  of  American  roads  in  the  mat- 
ter of  cost  statistics,  as  the  Santa  Fe,  have  very  full  and 
accurate  figures  of  the  average  ton-mile  cost  of  handling 
freight  on  the  various  divisions  of  the  system.  The  tre- 
mendous task  of  tabulating  systematically  the  amounts 
by  which  particular  items  vary  from  these  averages,  is 
not  yet  attempted.     As  they  stand,  however,  the  averages 


I40  LOCAL  FREIGHT  DISCRIMINATIONS  [140 

are  useful  in  guiding  the  making  of  rates,  for  they  fur- 
nish a  check  on  undue  concessions.  The  statistical 
office  can  be  in  constant  touch  with  the  traffic  depart- 
ment, and  can  call  attention  to  any  rate  which  approaches 
dangerously  near  the  cost  line,  with  the  result  that  atten- 
tion is  focussed  on  such  rates,  and  that  it  is  less  likely 
that  unprofitable  ones  should  be  continued,  merely  for 
lack  of  careful  scrutiny. 
""  In  a  word,  then,  by  their  more  formal  methods  of 
reckoning  cost,  the  continental  European  railway  rules 
out  many  possible  shipments  having  a  low  "  subjective 
value  "  as  being  worth  less  than  the  average  cost  of  car- 
riage for  shipments  of  their  general  class,  whereas  the 
American  road  is  inclined  to  make  reductions  to  attract 
such  shipments,  stopping  only  at  the  marginal  cost  of 
carrying  them.  But  the  foreign  idea  of  "  value  of  ser- 
vice "  is  something  different  "from  mere  subjective  value. 
It  is  expressed,  by  Teutonic  writers  especially,  as  the  re- 
sult of  averaging  up  the  many  subjective  values,  and  the 
result  is  given  by  Rank  the  name  "objective  value"  to 
distinguish  it.' 

This  concept  of  "  objective  value  "  may  be  interpreted 
somewhat  after  this  fashion.  Every  shipment  that  moves 
is  worth  more — has  greater  subjective  value — than  the 
price  charged.  If  rates  were  fixed  at  cost,  every  ship- 
ment would  give  rise  to  a  certain  social  surplus  going  to 
the  producers  and  consumers  directly  concerned.  Now 
if,  on  all  the  shipments  covered  by  a  particular  rate, 
these  consumers'  and  producers'  surpluses  can  be  aver- 
aged, we  will  have  in  this  average  a  fair  definition  of  the 
"objective  value"  which  figures  in  the  speculations  of 
the  theoretical  champions  of  the  Staff eltarif . 

'  Rank,  op.  cit.  passim;  Also  Ulrich,  Staffeltarife und  Wasserstrassen y 
p.  135- 


i 


141  ]     GENERAL  PRINCIPLES  OF  DISTANCE-TARIFFS    141 

This  idea  is  plainly  quite  different  from  the  "value  of 
service "  which  governs  under  a  private  economy, 
namely,  the  point  of  maximum  net  earnings.  The  "  ob- 
jective value "  idea  leads  to  conclusions  more  or  less 
similar  but  far  from  identical/  As  to  classification,  both 
ideas  lead  to  the  same  results,  the  one  in  order  to  make 
a  maximum  profit,  and  the  other  in  order  (while  making 
a  reasonable  profit)  to  absorb  in  every  case  a  reasonable 
and  fairly  uniform  share  of  the  average  consumers'  and 
producers'  surplus,  as  defined  above. 


The  matter  may  be  expressed  in  a  diagram  in  which 
distance  is  measured  on  the  horizontal  axis,  and  values 
and  costs  per  unit  of  commodity  on  the  vertical  axis.* 
Let  the  curve  A  X  B  represent  the  manner  in  which  the 
cost  of  carriage  increases  with  the  distance,  so  ^hat  for 


iRank,  op.  ciL,  p.  573. 

'The  diagram  is  the  writer's  own  version  of  the  attempt  to  apply  the 
doctrine  of  average  value  to  the  problem  of  local  discrimination. 


142  LOCAL  FREIGHT  DISCRIMINATIONS  [142 

any  distance  A  W,  the  cost  is  measured  by  the  altitude 
W  X.  Let  the  height  A  F  represent  the  highest  value 
which  anyone,  wherever  situated,  puts  on  the  service  in 
question.  (Competition  of  railroads  is  here  disregarded, 
and  the  distance  A  F  may  represent  the  cost  of  local 
manufacture  of  a  substitute  commodity.)  Then  the 
maximum  consumers'  and  producers'  surplus  arising  to 
anyone  out  of  any  shipment  A  W  is  represented  by  the 
distance  X  Z.  The  average  of  all  such  surpluses  (the 
"objective  value"  of  the  service),  may  be  represented 
by  the  distance  X  Y.  Then  the  locus  of  all  points  similar 
to  Y  will  be  a  line  giving  the  objective  value  of  the  ser- 
vice for  any  distance,  and  it  will  take  a  shape  somewhat 
like  the  curve  D  E  Y  B.  Now  if  A  C  represents  the  cost 
of  carriage  from  A  by  the  best  method  that  may  be  sub- 
stituted for  rail  carriage,  we  have  as  the  value  of  service 
curve  the  line  A  E  Y  B,  which  is  exactly  the  form  ap- 
proached by  the  typical  Staj^eltarif. 

In  the  matter  of  carrying  out  this  theory  of  striking 
the  average  of  a  large  number  of  subjective  values,  four 
points  are  to  be  noted.  First,  it  is  physically  impossi- 
ble to  discover  all  the  subjective  values  and  strike  an 
exact  average.  Secondly,  it  is  nevertheless  possible  to 
know  the  volume  of  traiific  moving  at  existing  rates,  and 
to  estimate  roughly  the  effects  on  traffic  of  changes  in 
rates,  down  to  cost  or  up  to  a  point  where  traffic  would 
cease.  Thirdly,  what  fixes  the  maximum  limit  of  charges 
is  not,  usually  the  local  production  of  a  substitute  com- 
modity, but  the  competition  of  similar  goods  shipped 
from  some  other  large  producing  center,  so  that  the 
limit  is  much  more  irregular  than  the  ideal  line  F  B. 
Fourthly,  if  the  limit  at  B  represents  the  competition  of 
a  producer  of  this  kind  who  ships  over  the  rails  of  the 
same    company,  it  will  not  pay   the  road  to  reduce  its 


143]     'GENERAL  PRINCIPLES  OF  DISTANCE-TARIFFS    143 

profits  to  a  minimum  merely  to  stimulate  shipments  from 
A.  Rather  it  will  raise  the  rate  above  the  point  B,  and 
let  that  market  be  served  by  some  producer  out  of  whose 
shipments  it  can  make  some  profit.  In  choosing 
between  a  long  haul  and  an  alternative  short  one,  a 
road  may  accept  the  long  one  at  a  lower  ton-mile  rate  of 
profit,  but  never  at  a  lower  absolute  profit  than  the  short 
haul  would  afford.  Hence  the  Staffeltarif,  to  avoid 
actual  wastes,  should  never  approach  and  reach  the  curve 
of  cost.  It  should  rather  tend  constantly  away  from 
cost  or  at  most  run  parallel  with  it  in  its  upper  sections. 
Thus  the  tariff  might  be  expected  to  take  the  shape  of 
the  curve  A  G  rather  than  that  of  A  E  Y  B  in  the  dia- 
gram, '  and  any  reductions  necessary  to  guard  against 
the  competition  of  other  roads  may  be  made  as  excep- 
tions without  affecting  the  curve.  And  in  fact  the  curve 
A  G,  rather  than  the  other,  is  the  type  of  the  actual 
tapering  distance,  tariff. 

Finally,  it  must  be  noted  that  the  "  objective  value  of 
service,"  which  is  allied  to  the  principle  of  equal  sacri- 
fice, is  a  very  intangible  quantity,  and  that  the  effect  of 
a  rate  as  seen  in  the  profit  account  is  a  much  more 
tangible  one  and  one  which  must  needs  be  taken  into  ac- 
count. Moreover,  on  the  assumption  that  there  must  be 
some  kind  of  a  scale,  the  StaffeltaHf  is  the  one  which 
comes  nearest  furnishing  maximum  profits  for  a  given 
burden  laid  on  the  shippers,  or  a  given  desirable  profit 
with  a  minimum  burden  on  the  shippers. 

*  Cf.  Huebner,  Annals  of  Amer.  Acad,  of  Pol.  and  Social  Science, 
March,  1907,  p.  84.  Certain  German  Ausnahmetarife  are  here  de- 
scribed, composed  of  two  parts.  One,  the  transportation-charge  proper, 
increases  continually  with  distance,  and  the  other  or  "fixed"  charge 
increases  with  distance  up  to  100  km.,  but  not. beyond.  Such  a  charge, 
added  to  a  transportation  charge  truly  representing  the  curve  of  cost, 
would  produce  a  result  virtually  identical  with  the  curve  A  G  in  the 
diagram. 


144  LOCAL  FREIGHT  DISCRIMINATIONS  [144 

Of  course  no  scale  would  accomplish  this  in  all  cases 
and  under  all  circumstances;  merely  in  the  average  of  the 
ordinary  cases.  Thus  no  treatment  of  the  principles  of 
such  scales  would  be  correct  which  failed  to  mention 
the  system  of  exceptions,  asunder  direct  competition  the 
fundamental  basis  of  the  scale  falls  through,  it  is  no 
longer  correct  to  make  such  shipments  pay  as  a  minimum 
a  pro-rata  share  of  all  the  operating  expenses.  Any 
road  under  the  competition  of  agencies  not  subject  to 
the  same  regulations,  may  be  forced  to  accept  shipments 
down  to  the  special-cost  limit.'  This  concession,  to  the 
German  or  Austrian  theorist,  is  a  regrettable  but  neces- 
sary violation  of  "scientific  principles,"  and  should  not 
be  extended  to  intermediate  stations.  Such  a  policy 
would  only  make  discrimination  worse  by  increasing  the 
number  of  people  specially  favored,  while  it  would  un- 
justly lay  on  the  road  itself  a  heavier  sacrifice  than  the 
act  of  competing  makes  necessary.^  Accordingly,  in 
Austria  the  long-and-short-haul  principle  is  not  applied 
to  rates  in  competition  with  waterways  or  foreign  car- 
riers, nor  to  seaport  competition,  nor  to  direct  competi- 
tion of  one  road  with  another  having  a  shorter  route 
between  common  terminals. ^  It  would  be  entirely  arbi- 
trary to  give  the  shorter  haul  a  lower  rate  merely  because 
it  happens  to  be  included  in  the  longer  haul,  while  refus- 

'  Rank,  Eisenbahntarifwesen,  p.  404. 

^  Ibid.,  pp.  424-428.     Rank,  Eisenbahntariftechnik,  pp.  55-63. 

'  Rank,  Eisenbahntariftechnik,  p.  61 .     A . , B C D . 

If  A,  B,  C  andD  are  stations  on  a  continuous  rail  route,  subject  to  com- 
petition at  the  termini,  then  the  road  may  lower  its  rates  for  the  haul 
A  D,  even  though  the  rate  A  D  thus  becomes  lower  than  A  C.  But 
the  road  may  not  go  further  and  make  the  rate  A  C  lower  than  A  B. 
Moreover,  the  road  controlling  the  shortest  route  must  commonly  stick 
to  its  scale  and  not  grant  any  special  reduction.  This  is  far  from  per- 
mitting anything  like  the  American  "basing-point"  system. 


145]     GENERAL  PRINCIPLES  OF  DISTANCE-TARIFFS     145 

ing  such  a  rate  to  other  local  shippers  over  similar  dis- 
tances whose  routes  are  not  included  in  a  specially 
favored  stretch.' 

Further  exceptions  may  be  made  for  various  causes. 
On  stretches  where  operating  cost  is  high,  or  where  the 
capital  investment  per  mile  is  far  above  the  average,  a 
"  schedule  mileage  "  greater  than  the  true  distance  may  be 
used.^  This  is  hardly  an  exception  to  the  principle  of 
the  scale,  but  may  be  regarded  as  a  means  of  basing  it 
more  nearly  on  the  true  curve  of  cost  instead  of  on  the 
false  curve  which  results  from  assuming  that  all  like  dis- 
tances cost  alike.  If  a  road  owns  two  routes  between 
the  same  two  points,  it  may  for  convenience  adopt  on 
the  longer  route  the  schedule  distance  of  the  shorter.^ 

Through  or  joint  rates  give  rise  to  another  whole 
class  of  exceptions.  Such  rates  may  be  made  by  simply 
adding  the  locals;  and  where  the  locals  themselves  are 
exceptions  to  the  regular  scale,  this  simple  course  is 
usually  followed.  The  through  rate  may  be  reduced 
below  the  sum  of  the  locals.  Where  terminal  charges 
are  used,  one  of  them  may  be  subtracted  from  each  local 
rate,  leaving  the  distance-scale  otherwise  untouched. 
Or  special  scales  may  be  granted  to  through  shipments, 
lower  than  those  used  for  local  hauls.  Or,  finally,  if  the 
through  shipment  is  subject  to  special  competition,  a 
special  rate  of  the  station-to-station  sort  may  be 
granted.*  As  to  the  reasons  for  such  reductions ;  aside 
from  the  competitive  reason  just  mentioned,  they  con- 
form to  the  general  principle  of  reducing  ton-mile 
charges  as  distance  increases  and  may  merely  extend 
this    principle    beyond    the    limits    of    a    single    railway 

'  Ulrich,  Staffeltarife  und  Wasserstrassen,  p.  34;  Rank,  op.  cit.,  p.  58. 
^  Rank,  op.  cit.,  p.  8.  ^ Ibid.,  p.  7.  *  Ibid.,  pp.  66-72. 


146  LOCAL  FREIGHT  DISCRIMINATIONS  [146 

company's  lines.  Further  than  this,  such  rates  are  used 
to  further  agreements  to  divide  traffic.  Such  agree- 
ments, not  being  forbidden  as  in  the  United  States,  are 
extensively  used,  and  it  is  almost  indispensable  that  rates 
should  be  so  fixed  that  the  traffic  will  surely  move 
over  the  agreed  route.  To  do  this  the  rate  must,  of 
course,  be  less  than  the  sum  of  the  locals  by  any  other 
route,  and  also  it  should  preferably  be  enough  less 
so  that  any  possible  fluctuations  of  local  scales  on  the 
different  lines  will  not  disturb  the  adjustment.'  Such  an 
adjustment  may  produce  discrimination,  but  clearly  of  a 
very  mild  type  compared  to  those  resulting  from  unre- 
strained competition. 

Still  another  cause  for  exceptional  rates  is  furnished 
by  market  competition.  This  appears  most  markedly, 
perhaps,  in  export  rates,  but  it  affects  intrastate  traffic 
also,  and  it  even  results  in  exceptions  to  shippers  whose 
competitors  are  situated  on  the  lines  of  the  same  com- 
pany.^ Still  other  causes  of  exceptions  are  a  purpose  to 
stimulate  business  undertakings  which  are  at  a  geo- 
graphical disadvantage,  to  stimulate  industry  and  agri- 
culture in  general  and  increase  traffic,  and  to  relieve 
cases  of  special  distress  or  special  need.^ 

^  Rank,  op.  cit.,  pp.  66-72. 

*  Rank,  Eisenbahntarifwesen ,  p.  429. 

^  Seidler  &  Freud,  Die  Eisenbahntarife,  etc.,  p.  24. 


CHAPTER    X 

AN    AMERICAN    DISTANCE-TARIFF 

The  foregoing  brief  analysis  should  have  indicated 
first,  the  general  principles  underlying  scale-rates  and,  sec- 
ondly, their  adaptability  and  the  elasticity  possible  under 
them.  The  question  of  greatest  interest  is  how  far  this 
method  could  be  introduced  into  the  United  States,  as  a 
solution  of  some  at  least  of  our  discrimination  problems. 
The  application  of  a  single  uniform  system  of  this  kind 
or  of  any  kind  is  of  course  not  to  be  thought  of,  save  in 
some  possible  far  distant  future  when  conditions  shall  have 
changed  and  adapted  themselves  slowly  during  a  process 
of  gradual  approach  to  the  final  goal.  It  would,  of 
course,  be  many  times  more  difficult  than  the  prelimi- 
nary problem  of  uniform  classification,  which  baffles  the 
experts  today.  Moreover,  it  would  require  to  be  volun- 
tarily introduced  by  a  national  railway  consolidation  in 
private  hands,  or  if  imposed  by  the  government,  the  ex- 
tent of  regulation  needed  would  be  virtually  incompatible 
with  private  ownership,  by  Americans  at  least.  The  mere 
problem  of  uniformity  over  such  a  large  and  varied  area, 
a  problem  held  hopeless  in  Europe,  would  hardly  be  much 
easier  of  solution  here,  and  would  involve  the  question 
of  continuing  or  destroying  the  present  varieties  of  rate 
structure,  which  adapt  themselves  to  the  traffic  condi- 
tions of  the  different  regions. 

But  this  is  far  from  saying  that  it  is  impossible  for 
America  to  make  any  practical  use  of  foreign  experiences 
147]  147 


148  LOCAL  FREIGHT  DISCRIMINATIONS  [148 

and  methods  in  the  matter  of  distance  tarififs.  Such 
tariffs  are  indeed  in  use  in  various  states,  in  much  the 
same  forms  as  the  foreign  ones.  The  Trunk  Line  rate 
system  is  famiHar  as  an  example  of  an  approximate  dis- 
tance tariff;  but  other  experiments  have  gone  farther  in 
the  development  of  exact  scales,  increasing  with  distance 
at  a  falling  rate  and  based  on  calculations  of  the  average 
cost  of  the  different  kinds  of  traffic.  Perhaps  the  most 
interesting  work  of  this  kind  has  been  done  by  the  Rail- 
1  road  Commission  of  Wisconsin.  This  able  body  of  men 
has  been  entrusted  with  wide  powers  of  rate-fixing,  and 
has  worked  out,  for  its  own  guidance  as  a  standard  of 
reasonableness,  what  amounts  to  a  system  of  distance 
tariffs.  This  is  based  on  very  full  calculations  of  the 
average  cost  of  moving  tralBc  under  various  conditions 
of  loading  and  for  different  distances. 

The  general  mode  of  procedure  is  as  follows.  The 
freight  expenses  of  the  road  in  question  are  separated 
from  the  passenger  by  the  method  laid  down  for  all  rail- 
roads in  the  Interstate  Commerce  Commission's  mem- 
orandum on  that  subject.  In  further  analyzing  freight 
expenses  the  principal  problem,  that  of  apportioning  the 
various  items  of  general  expenses,  is  met  for  the  most 
part  by  dividing  them  in  the  same  ratio  as  the  special 
items  which  can  be  directly  apportioned.  First,  all  ex- 
penses for  terminal  handling  are  separated  and  the  aver- 
age terminal  cost  per  ton  is  obtained.  Similarly,  the 
movement  expenses  are  separated  and  the  average  move- 
ment cost  per  ton-mile  is  found. 

But  here  differences  of  operating  conditions  have  to  be 
allowed  for,  and  the  chief  of  these  is  the  difference  be- 
tween the  way  train  and  the  through  freight.  Accord- 
ingly, the  average  difference  in  cost  per  ton-mile  of 
these  kinds  of  traffic  is  calculated  and  the  way  freight  is 


149]  "^^  AMERICAN  DISTANCE-TARIFF  149 

found  to  be  somewhat  more  than  twice  as  expensive  as 
the  through  freight.  The  average  length  of  the  way- 
freight  haul  is  also  estimated  in  round  numbers.  Here, 
then,  are  all  the  materials  for  a  Staffeltarif  ^n\\.\v  a  falling 
scale.  For  the  average  ton-mile  movement  expense  can 
now  be  broken  up  into  the  two  averages  giving  the  ex- 
pense for  hauls  of  less  than  way-freight  distance,  and  the 
expense  for  all  further  distances.  For  every  mile  up  to 
the  length  of  the  way-freight  haul,  the  average  ton-mile 
cost  of  way-freight  movement  is  charged.  For  every 
added  mile  beyond  this  distance,  the  (lower)  average  ton- 
mile  cost  of  moving  through-freight  is  charged. 

Thus  we  have  a  table  showing  without  material  error 
the  cost  of  moving  a  ton  of  freight  any  distance,  under 
average  conditions,  on  the  assumption  that  it  bears  its  full 
quota  of  all  general  outlays  including  a  reasonable  return 
on  the  capital  invested.  And  this  table  is  in  the  form  of 
a  67«^(£'//^rz7  with  a  terminal  charge  and  a  mileage  charge 
which  starts  at  a  high  level  and  falls  to  less  then  half  its 
original  rate  after  passing  the  point  representing  the 
limit  of  the  relatively  expensive  way-freight  haul. 

This  scale  is,  of  course,  only  a  grand  average,  based  on 
the  assumption  that  all  commodities  should  contribute 
the  same  percentage  above  the  cost  of  handling,  and  also 
on  the  assumption  that  all  goods  are  equally  expensive 
to  move.  It  remains  to  make  allowances  for  these  fac- 
tors. First,  added  scales  are  made,  calculated  to  give 
different  rates  of  return  on  the  capital  investment  of  the 
road  {i.  e.,  provided  they  were  to  be  applied  to  the  whole 
traffic).  Thus  if  a  tariff  of  rates  100  per  cent,  above 
the  average  cost  of  operation  would  (on  the  entire 
traffic)  yield  8  per  cent,  to  the  owners,  then  a  tariff 
three-fourths  as  high  would  yield  4  per  cent.,  one  five- 
eighths  as  high  would  yield  2  per  cent,  and  one  twice 


150  LOCAL  FREIGHT  DISCRIMINATIONS  [150 

as  high  would  yield  24  per  cent.  This  furnishes  a 
basis  for  classification,  in  so  far  as  this  can  be  based  on 
the  value  of  goods  alone.  If  it  be  assumed  that  the  gen- 
eral run  of  existing  classifications  are  reasonable  in  this 
respect,  then  a  close  examination  of  them  furnishes  data 
as  to  what  percentage  of  operating  profit  goods  of  any 
given  value  are  normally  made  to  pay,  and  this  may  be 
adopted  as  prima  facie  reasonable.' 

There  remains  the  problem  of  allowing  for  dififerences 
in  cost.  One  of  the  most  important  factors  affecting 
this  is  the  ratio  of  "  dead  weight  "  to  "  paying  weight " 
in  any  particular  case.  In  this  connection  it  is  estimated 
by  the  commission  that  movement  expenses  vary  most 
nearly  in  proportion  to  the  gross  ton-mileage  (including 
weight  of  rolling-stock).  The  average  cost  per  gross- 
ton-mile  can  be  easily  obtained  and  then  the  cost  per 
cwt.  of  paying  freight  can  be  calculated  for  all  varieties 
of  rolling-stock  and  all  loads  up  to  the  full  capacity  of 
the  cars.  Thus  a  car  loaded  to  half  its  capacity  costs 
less  to  haul  than  one  fully  loaded,  but  more  than  half  as 
much,  so  that  the  cost  per  cwt,  of  paying  freight  will  be 
perhaps  thirty- five  or  forty  per  cent  greater  according  to 
the  weight  of  the  car  and  its  capacity.  The  commission 
has  very  full  tables  of  this  kind,  adjusted  for  the  differ- 
ences between  way  and  through  freight.^  The  figures  of 
cost  for  empty  cars  are  also  useful,  since  any  regular 
back  movement  of  empties  must  be  paid  for  by  the  traffic 
which  makes  it  necessary.  Thus  a  large  percentage  of 
live-stock  cars  must   return  empty,   and  the  ascertained 

'  Pulp  and  Paper   Manufacturers  of  Wis.  v.  Chi.  &  N.  W.  Ry.  Co. 
(1908);  decision  of  the  Wisconsin  Commission,  no.  89,  pp.  44-46. 

''Mentioned  in  Houser  v.  Chi.,  S.  &  P.,  Minn.  &  Omaha  Ry.  Co. 
(1907);  decision  of  the  Wisconsin  Commission,  no.  59,  pp.  20,  30. 


151]  AN  AMERICAN  DISTANCE-TARIFF  151 

cost  of  this  backward  movement  may  be  prorated  on  to 
the  paying  haul  of  Hve  stock.' 

Still  other  circumstances  have,  of  course,  to  be  allowed 
for,  such  as  special  cars  and  services  rendered,  difficulty 
of  handling,  density  of  traffic,  speed,  grades,  risk  and 
commercial  circumstances,  including  both  direct  and 
market  competition.  But  the  fact  stands  out  that  such 
considerations,  so  far  as  they  affect  cost,  are  much  more 
definitely  treated  as  variations  from  a  known  average 
than  if  there  is  no  such  working  basis.  It  is  evident  in 
the  proceedings  of  the  Wisconsin  Commission  that  the 
railways  carry  the  burden  of  proving  that  such  special 
conditions  exist.  It  may,  for  instance,  be  claimed  that 
charges  are  higher  than  those  in  neighboring  states,  but 
in  the  absence  of  figures  showing  the  effect  of  this  either 
in  the  higher  rating  of  the  engines  or  in  the  lighter  weight 
of  trains,  the  claim  is  given  scant  attention. 

But  will  not  the  introduction  of  rates  based  on  such 
formulae  fail  to  allow  for  industrial  needs?  Will  it  not 
be  too  inflexible?  Will  it  allow  sufficiently  for  the  de- 
veloping of  traffic?  How  about  the  principle  of  group 
rates  ?  In  one  way  the  tariffs  as  they  stand  make  special 
concession  to  young  sections  of  country.  For  they  do 
not  differentiate  between  the  main  line  and  the  branches, 
except  as  the  branches  carry  a  larger  proportion  of 
short-distance  traffic  which  moves  at  relatively  high  rates. 
But  the  branches,  on  account  of  their  relatively  sparse 
traffic,  have  often  much  higher  operating  costs  than  the 
main  lines,  so  that  their  net  earnings  are  relatively  low. 
This  practice  is  upheld  by  the  commission  on  "  infant  in- 
dustry "  grounds,  and  as  a  means  of  building  up  the 
sparsely-settled  districts.     Further  than  this,  the  formulae 

'  Houser  v.  Chi.,  St.  P.,  Minn.  &  Omaha  Ry.  Co.,  op.  cit.,  p.  21. 


152  LOCAL  FREIGHT  DISCRIMINATIONS  [152 

are  departed  from  whenever  sufficient  cause  is  shown, 
but  they  are  so  well  constructed  that  departures  of  more 
than  ten  or  fifteen  per  cent,  are  not  necessary. 

As  to  the  group-rate  principle,  a  distinction  is  made 
between  agricultural  and  manufactured  products.  In  the 
latter  case,  where  roads  have  given  competing  producers 
at  different  distances  identical  rates  to  market,  the  com- 
mission has  usually  let  the  adjustment  stand,  on  the 
principle  of  the  "  established  interests "  argument. 
The  decisive  thing,  however,  is  the  sum  of  all  the 
transportation  charges  borne  by  the  factory  in  question, 
so  that  a  lowering  of  the  rate  on  raw  materials  may  off- 
set a  raising  of  that  on  the  finished  product  and  vice 
versa.'  On  agricultural  products  on  the  other  hand,  this 
"vested  interests"  argument  does  not  apply,  at  least  not 
under  the  conditions  prevailing  in  Wisconsin.  On  soil 
of  which  the  products  can  barely  find  a  profitable  market, 
there  is  not  likely  to  be  enough  capital  sunk  in  the  shape 
of  improvements  to  cause  a  material  loss  if  the  rates 
were  to  be  made  a  trifle  less  favorable.  Such  changes 
afifect  the  local  margin  of  cultivation  somewhat,  and 
have  their  chief  influence  on  ground-rents,  which  are  not 
"vested  interests"  within  the  meaning  of  the  term  as 
used  in  this  connection.  Both  justice  as  between  land 
owners  and  the  most  economical  use  of  soils  demand,  if 
possible,  a  "  natural  "  adjustment  of  rates  as  between 
localities. 

And,  finally,  as  to  the  practical  usefulness  of  such 
scales,  it  may  be  sufficient  to  cite  the  voluntary  intro- 
duction of  similar  tariffs  by  the  railways  of  Wisconsin, 
and  the  widespread   use  of  somewhat  similar  tariffs  in 

'Pulp  and  Paper  Manufacturers  v.  Chi.  &  N.  W.  Ry.  Co.,  op.  cit., 
pp.  IS  et  seq. 


153]  ^^  AMERICAN  DISTANCE-TARIFF  153 

other  states.  It  is  true  that  the  use  of  such  rates  is  easier 
in  states  like  those  of  the  Middle  West,  where  there  are 
no  marked  contrasts  in  topography,  so  that  operating 
conditions  are  fairly  uniform.  It  may  well  be  that  in 
extending  the  system  to  states  which,  like  Colorado, 
contain  both  plains  and  mountain  regions,  the  use  of 
schedule  mileages  would  be  necessary  in  order  to  bring 
comparative  charges  somewhere  near  comparative  costs. 

In  this  connection  it  seems  to  the  author  that  there 
may  be  room  for  further  experimentation.  Schedule- 
distances  are  used  to  allow  for  high  operating  cost  on 
certain  sections  and  also  to  allow  for  high  capital  cost, 
such  as  is  involved  in  bridges,  tunnels,  fills,  etc.  Now, 
granting  that  both  kinds  of  allowance  should  be  made, 
would  it  not  be  possible  to  let  each  bear  on  that  part  of  the 
charge  to  which  it  is  directly  related  ?  Tariffs  like  those  of 
the  Wisconsin  commission  fall  naturally  into  two  parts, 
the  figures  for  operating  expenses  and  the  loading  for 
return  on  the  investment.  Would  it  not  be  possible  to 
separate  these  clearly,  and  if  a  section  of  road  showed 
operating  costs  50  per  cent  above  the  average,  let  each 
mile  count  as  one  and  one-half  miles  z'w  the  calciclation  of 
operating  expenses  alone.  Or,  if  on  another  section  of 
road,  tunnels  made  the  capital  cost  per  mile  triple  the 
average  for  the  whole  line,  let  each  mile  count  as  three 
in  making  up  the  loading  for  rettirn  on  the  investmejit. 
This  would  merely  apply  the  principle  of  special  bridge- 
tolls  in  a  far  more  complete  way.  It  is  quite  probable 
that  the  complications  it  would  introduce  would  out- 
weigh any  gains  in  convenience  and  accuracy,  but  as  a 
possibility  it  is  worth  noting. 

One  of  the  most  serious  indictments  brought  against 
the  whole  scheme  of  distance  tariffs  is  that  they  tend  to 
crush  out  local  jobbing  centers  because  the  double  haul 


154  LOCAL  FREIGHT  DISCRIMINATIONS  [154 

involved  is  always  more  costly  than  a  single  through 
haul.  This  fact  is  unmistakable,  but  without  going  into 
the  question  in  detail,  two  contrary  considerations  may 
be  suggested.  First,  are  those  local  jobbing  interests 
worth  what  it  costs  to  maintain  them  ?  Are  they  not, 
some  of  them,  wasteful  survivals,  bolstered  up  by  rate- 
favors  and  increasing  the  real  cost  of  production  of 
society's  goods  and  services?  The  recent  discussion  of 
the  high  cost  of  living  has  focused  so  much  attention 
on  middlemen's  profits  that  the  "  local  jobber  "  argument 
against  distance  rates  may  well  lose  much  of  its  popu- 
larity. 

Secondly,  what  is  the  alternative?  It  seems  to  be 
either  the  "  basing-point "  or  the  "basing-line  "  system. 
The  former  involves  violations  of  the  long-and-short- 
haul  principle  which  cannot  be  justified  once  the  competi- 
tion which  caused  them  has  ceased  to  be  a  compelling 
force.  The  latter  system  involves  the  arbitrary  selection 
of  "  basing-line "  stations  which  are  given  a  chance  to 
develop  as  jobbing  centers,  and  an  equally  arbitrary  dis- 
crimination against  points  not  so  selected.  The  west- 
bound rates  to  points  west  of  the  Mississippi  are  made 
by  combining  the  rate  to  the  nearest  intermediate  basing- 
line  station  with  the  local  rate  from  there  to  the  destina- 
tion;  that  is,  by  a  "combination  on"  the  intermediate 
point,'  let  us  say,  St.  Louis.  This  means  that  the  jobber 
at  the  particular  point  chosen  pays  no  more  for  his  two 
hauls  than  a  through  shipper  for  his  one,  but  jobbers 
anywhere  else  must  pay  more.  All  other  towns  which 
are  or  could  become  jobbing  centers  have  cause  of 
grievance.  The  recent  complaint  of  Denver  illustrates 
this  point,   and  also  the  further  fact    that  if  every  just 

'  McPherson,  Railroad  Freight  Rates,  p.  115. 


155]  AN  AMERICAN  DISTANCE-TARIFF  155 

complaint  is  to  be  satisfied  by  the  creation  of  new  com- 
bination-points, there  is  no  limit  possible  until  the  sys- 
tem breaks  down  of  its  own  weight.  Thus  the  champions 
of  local  jobbing  interests  have,  to  say  the  least,  some 
weak  points  in  their  own  case. 

In  final  summary  the  main  contentions  of  this  mono- 
graph may  be  said  to  be  the  following.  Firstly,  the 
causes  leading  to  the  discriminations  are  not  peculiar  to  I 
railways,  nor  do  they  in  the  long  run  justify  such  a  wide  ■ 
range  of  inequalities  as  many  writers  have  suggested. 
Secondly,  the  private  interests  of  roads  cannot  be  shown 
to  be  identical  with  the  public  interest,  and  in  particular 
indirect  or  market  competition,  as  well  as  direct  or 
junction  competition,  contains  motives  which  lead  to 
discriminations.  Thirdly,  while  a  system  embodying 
perfectly  the  "  natural "  relation  of  rates  based  on 
"  comparative  cost  "  is  impossible,  still  that  principle  is 
at  the  basis  of  relative  reasonableness  as  between  locali- 
ties. Fourthly,  other  standards  have  been  more  or  less 
definitely  worked  out  by  commissions  and  courts,  to  be 
used  in  connection  with  that  of  "  comparative  cost." 
Fifthly,  distance  tariffs,  while  based  on  the  "  comparative 
cost"  idea,  are  still  flexible  enough  in  use  to  allow  for 
all  the  other  necessary  considerations.  Foreign  systems 
of  this  kind  furnish  good  models,  so  far  as  they  are 
based  on  purely  economic  grounds,  and  not  involved  in 
international  commercial  rivalries.  And,  lastly,  scientifi- 
cally constructed  distance  tariffs  are  being  tried  in  the 
United  States  with  results  which  justify  the  prediction 
that  they  have  here  a  useful  future  before  them. 


'*^U''0.«N»fi. 


VITA 


John  Maurice  Clark  was  born  in  Northampton, 
Massachusetts,  on  November  thirtieth,  1884,  and  edu- 
cated, first,  in  the  public  schools  of  that  city  and  after- 
wards in  the  Horace  Mann  School  of  New  York.  He 
entered  Amherst  College  in  1901,  and  was  graduated  in 
1905,  receiving  the  degree  A.  B.,  and  was  a  student  at 
Columbia  University  from  1905  to  1908.  He  attended 
the  lectures  of  Professors  Seligman,  Clark,  Seager,  Moore, 
A.  S.  Johnson,  Giddings,  Burgess  and  Dunning,  and  the 
seminars  of  Professors  Seligman,  Clark  and  Seager,  re- 
ceived in  1906  the  degree  of  M.  A.,  and  was  appointed  a 
University  Fellow  in  Economics  in  1907.  For  two  years 
he  has  been  an  instructor  in  Political  Economy  in  Colo- 
rado College.     He  is  a  member  of  the  Phi  Beta  Kappa 

Society. 

157 


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